September 1, 2009  

The people problem

Personnel costs are overwhelming the Pentagon

During the presidential campaign, Democratic candidate Barack Obama promised that, if elected, he would “place people first” in his defense priorities, crafting benefits to ease the burden of military service for war fighters, veterans and their families. Within months of taking office, the president announced initiatives to raise military pay, provide job training for military spouses and expand counseling for families under stress. The redesigned White House Web site included a new section addressing the needs of veterans. And during his early days in office, Obama seldom missed an opportunity to acknowledge the sacrifices of service members, frequently reiterating his commitment to their welfare.

With public opinion polls showing that the military is one of America’s most trusted institutions, expressions of sympathy and support for service members have become commonplace among public figures of every political persuasion. No politician publicly questions the affordability of military benefits, and members of Congress sometimes seem to be competing in their efforts to devise new entitlements for those who have served. But this generosity is unfolding against the backdrop of a federal budget deficit averaging $5 billion per day, so the money needed to deliver these expanded benefits all must be borrowed. With the Obama administration planning to curtail deficit spending in the future, there is a danger that uncontrolled growth of people costs at the Pentagon will unbalance and harm the nation’s defense posture.

Obama did not create the problem of escalating personnel costs, but by sticking with Bush administration plans to increase the size of the ground forces, crafting an array of new benefits and insisting on replacing contract personnel with federal employees in military support roles, he has made the fiscal challenge of funding the nation’s defense establishment much worse. This article is about the emerging crisis in military personnel costs. It describes how the creation of the all-volunteer force in the 1970s led to the current situation, how the various components of military compensation are growing at an unsustainable rate, and how personnel trends could undermine the nation’s ability to defend itself.

Volunteers aren’t cheap

The roots of the coming crisis in military personnel costs reach back to the Vietnam War. That conflict was highly controversial among voters, in part because many of the soldiers who fought the war were conscripted. Conscription, also known as the draft, was nothing new: Two-thirds of the service members who fought in the world wars were conscripted, as were about half of those who fought in the Korean War. During the Vietnam era, though, the draft became a focus of anti-war protesters because of supposed inequities in the way it was applied.

In the 1968 presidential campaign, Republican candidate Richard Nixon sought to capitalize on this widespread disaffection by pledging to abolish the draft. Upon entering office, he established a presidential commission to study how the military could transition to a force manned entirely by volunteers. The commission found that if service members were adequately compensated, it would be feasible to meet all military personnel needs without resorting to conscription.

In 1971, President Nixon signed a law ending the draft, and the all-volunteer force was born. From that point onward, the military was expected to compete with other employers in the labor market for recruits. The viability of the all-volunteer force thus depended on offering a package of pay and benefits that matched or exceeded those available to prospective recruits from the private sector.

That was not a hard thing to do in the early 1970s. The economy was weak, and the search for volunteers coincided with a U.S. withdrawal from Indochina that greatly reduced military personnel requirements. But the experience of subsequent years demonstrated that if military compensation did not keep up with private-sector alternatives, the recruiting of qualified war fighters and their retention in the ranks would suffer. So as the going rate for labor and essential services such as health care escalated in the overall economy, the cost of military pay and benefits rose, too.

The creation of the volunteer force has fostered a more educated, experienced and professional military establishment. The discipline problems and aberrant behavior of the Vietnam years are largely gone today, even though the force operates under similar stresses. But progress has come at a price. And given the terms of service — which include the possibility of death or permanent disability — nobody knows how much money might be required to attract the number of volunteers needed to prosecute a really big, protracted conflict. At the height of the Vietnam War, that number reached 3.5 million uniformed personnel.

From the start, the success of the all-volunteer force has required a lot more than just competitive pay. As a recent Rand Corp. research brief noted: “Besides good pay, careerists demanded quality-of-life benefits such as good housing, child care, health benefits, family advocacy programs, and military stores.” With more soldiers, sailors, airmen and Marines seeking to make military service a career rather than a brief detour from civilian life, Rand observed, it was crucial for the armed forces to become “family friendly.”

The bargain between the government and professional war fighters is well-understood today by policymakers and military leaders. In June, the chairman of the Joint Chiefs of Staff, Adm. Mike Mullen, spelled out for the Senate defense appropriations subcommittee what rewards are required to sustain the joint force: “It is the recruit and retain choices of our families — and, quite frankly, American citizens writ large — that will make or break the all-volunteer force. They will be less inclined to make those decisions should we not be able to offer them viable career options, adequate health care, suitable housing, advanced education and a prosperous life long after they’ve taken off the uniform.”

Unsustainable cost trends

Mullen’s compendium of benefits amounts to a better compensation package for service members than many taxpayers get from their own employers. Of course, civilian employers seldom expect workers to risk life and limb on the job, as the armed forces do. But the fact that relatively few civilian jobs can match the array of rewards provided to war fighters raises the question of whether current trends in the cost of military pay and benefits are affordable over the long run.

Apparently, the Obama administration thinks they are. Its fiscal 2010 budget request, released in February, called for a military benefits package that is “sustainable and affordable.” The administration then proposed to raise military pay above the rate of inflation to improve the purchasing power of service members; eliminate the offset of regular military retirement pay and disability retirement pay so veterans could receive both concurrently; upgrade the quality of military housing; and expand the availability of mental health services.

Considered separately, each of these initiatives would impose only a modest additional burden on the defense budget. But taken together, at a time when the number of service members is being increased by 92,000, the added burden is significant. And when the latest enhancements are combined with similar steps taken in every year of the current decade, the cost trends become worrisome.

Stephen Daggett, of the Congressional Research Service, said the after-inflation cost of military pay and benefits per active-duty service member increased by 45 percent from 1998 to 2009. In constant 2009 dollars, Daggett calculates, the cost of each service member rose from $55,000 annually to $80,000, and those figures do not include the growing burden of health care costs. Instead, they reflect outlays for basic pay, housing allowances, retirement benefits accrual and the like. Including health care expenses, the current cost for each service member rises above $100,000 per year. That imposing price tag still does not include the cost of training and equipping service members to do their jobs.

The budgetary burden imposed by rising military health care costs is especially troubling. When the Cold War ended in 1990, health care was consuming about 4 percent of the defense budget. That increased to 8 percent during the administration of George W. Bush and is projected to reach 12 percent in 2015. In dollar terms, the cost of the military health care system increased 144 percent during the Bush years, from $17 billion in fiscal 2000 to $42 billion in fiscal 2009.

Most of the growth in health care outlays is traceable to legislatively mandated expansion of benefits and price inflation in existing benefits. Congress added new military health care benefits in every year of the present decade. One new benefit in particular, Tricare for Life, to aid Medicare-eligible retirees and their spouses, increased the Defense Department’s annual medical bill by nearly $5 billion.

For the most part, though, the new benefits were relatively modest in cost, and therein lies much of the problem with rising military personnel expenditures. The price of specific health care initiatives such as expanded custodial care, improved prosthetics and reserve-component coverage may appear trivial in the context of a multitrillion-dollar federal budget, but when multiple new benefits are created each year and there is no mechanism for assessing cumulative budgetary impacts, the result is seemingly uncontrolled growth.

This lack of transparency concerning long-term consequences is especially pronounced in the case of military health care because budgeting for the function is fragmented among many accounts. But there is a similar lack of visibility into the future burden of other kinds of benefits, too. For instance, the “Post-9/11 Veterans Educational Assistance Act” to reward those serving after the terrorist attacks extended so many potential benefits to so many potential recipients that the act will probably cost the government more than $60 billion during the first 10 years it is in effect. It doesn’t take many such initiatives to unbalance the Pentagon’s long-term spending plans, particularly when the buying power of the military budget is headed downward.

Thus far, the conflicts in Iraq and Afghanistan have not been major direct contributors to the rise in military compensation costs. Most of the near-term costs for special pay and benefits associated with the wars have been handled through supplemental appropriations outside the regular defense budget. However, Bush-era contingencies have added indirectly to the future budgetary burden of military personnel in at least two ways. First, the increase in the size of ground forces that Obama backs was initially proposed in 2007 to cope with the stresses those forces were facing in fighting the Iraq war. The U.S. combat role in Iraq is now scheduled to end next year, but the budgetary burden of sustaining a bigger Army and Marine Corps will persist for the foreseeable future.

The Iraq and Afghanistan wars also contributed to a growing pay and benefits burden by generating widespread sympathy in the political system for the sacrifices of war fighters and their families. The global war on terrorism has involved the first big, multiyear military campaigns undertaken by the all-volunteer force since its inception at the end of the Vietnam War. Because the Army and Marine Corps have struggled to keep up with the operational demands of current campaigns, politicians have felt a strong sense of obligation to reward war fighters for their efforts.

The resulting pattern of escalating pay and benefits costs is distinctly different from compensation trends before this decade. As Daggett explained in congressional testimony earlier this year, the after-inflation cost of military pay and benefits per active-duty service member rose less than 20 percent from the early 1970s to the late 1990s. However, Daggett observed, such costs “rocketed up dramatically beginning in about fiscal year 1999” and now are about 60 percent higher than the levels prevailing when the volunteer force was created. The after-inflation cost of pay and benefits in the civilian economy has only risen about half that amount during the last 30 years, with most of the divergence between the two trend-lines coming in the current decade.

Eclipsing investment

The rising cost of uniformed personnel isn’t the only reason why people expenditures are increasing so fast at the Pentagon. Members of the civil service employed by the Defense Department are also receiving compensation gains well above the rate of inflation. Indeed, the fact that compensation for civil servants and health care for military families are funded in the Defense Department’s operations and maintenance account is the biggest single factor explaining the steady rise in readiness outlays.

That trend presumably will be reinforced by the administration’s decision to authorize 33,000 new civilian positions in the defense work force, and “in-source” support roles previously performed by outside contractors. Experts disagree about how to compare the year-to-year costs of public- and private-sector workers in carrying out such roles, but one fact is not in dispute: It is much easier to get rid of contractors than civil servants when their services are no longer needed. Thus, the government’s decision to replace contractors with civil servants probably entails financial obligations for pay and benefits that extend many decades into the future.

If federal tax receipts and the economy were growing at a rate commensurate with the rapid rise in defense personnel costs, then none of these trends would be worrisome. But they are not. Even before the recent recession took hold, economic growth rates were anemic, and the financial obligations of the federal government were rising at an unsustainable pace. This year is the first time in the history of the nation that the forward obligations of federal entitlement programs have exceeded the net worth of all U.S. households. So escalation of people costs at the Pentagon is emblematic of a broader national dilemma, one that will undoubtedly grow worse as the population ages and the U.S. economy loses ground to rising powers such as China.

The consequences for the nation’s defense posture, though, are more immediate. With the administration committed to a costly expansion of domestic entitlement programs at the same time financial markets and voters are demanding reductions in the federal deficit, it is nearly inevitable that the buying power of the defense budget will erode in the years ahead. If the cost of people keeps rising as military funds decline, then investment outlays must shrink to balance the Pentagon’s books.

A foretaste of what may lie ahead came earlier this year, when Defense Secretary Robert Gates proposed termination of the Air Force’s most capable air-superiority fighter, its next-generation bomber, its only jet transport currently in production, its future combat search-and-rescue helicopter and its most advanced communications satellite — all in a single news conference. Gates said the cuts were necessary to help fund a “rebalancing” of the nation’s defense posture, but implicit in that rationale was the reality that the new administration couldn’t afford the military investment program it had inherited while also covering the costs of an enlarged all-volunteer force.

If the Pentagon cannot do a better job of controlling growth in the cost of employee pay and benefits, then additional weapons cuts probably will be needed in every year of the Obama administration. Experience indicates that Congress will resist cuts to any part of the defense budget, but when forced to choose, it will almost always favor people over technology. The operational and political consequences of cutting funding for people arrive much sooner than the fallout from cutting weapons, and few legislators are willing to confront the angry representatives of military families, reservists and veterans. So weapons will be cut instead, and eventually, the joint force will lose much of its edge in war-fighting technology.

Proponents of a balanced defense posture will argue that no military “benefit” is more important than equipping the force with the latest war-fighting technology, but that reasoning probably won’t have much impact in the current fiscal environment. So it really is imperative to slow the rise in people costs if the nation is to preserve a military posture that reconciles current readiness with future preparedness. One place to start is by rethinking recent increases in the size of ground forces. The crux of the matter, though, is whether the political system can stop creating new benefits for war fighters, their families and veterans that are beyond the capacity of current tax receipts to cover. When a government has to sustain its defense posture by borrowing money from the same country that military planners regard as a future rival, it’s a sure sign that a change of direction is needed.

Loren Thompson is chief operating officer of the Lexington Institute.