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Costs of Military Pay and Benefits in the Defense Budget

For fiscal year 2013, the Department of Defense (DoD) requested about $150 billion to fund the pay and benefits of current and retired members of the military. That amount is more than one-quarter of DoD’s total base budget request (the request for all funding other than for military operations in Afghanistan and related activities).

Military Compensation Includes Cash Compensation and Substantial Retirement and Health Benefits

Of DoD’s $150 billion request for compensation in 2013, more than $90 billion would go to basic pay, food and housing allowances, bonuses, and various types of special pay. Another $16 billion would go to accrual payments that account for the future pensions of current service members who will retire from the military (generally after at least 20 years of service). In 2012, DoD paid 34 cents for each dollar of basic pay for active personnel and 24 cents for each dollar of basic pay for reserve personnel.

The remainder of DoD’s request for compensation in 2013—roughly $40 billion—would cover health benefits. Whereas 1.4 million military personnel serve on active duty, a total of nearly 10 million people are eligible for military health benefits. In addition to active-duty military personnel, the people who have access to health benefits include eligible family members of those personnel, retired military personnel and their eligible family members, survivors of service members who died while on active duty, and some members of the reserves and National Guard.

DoD’s request includes funding for TRICARE—the military health care program for current and certain retired service members. In addition, the department makes accrual payments for the future health care of current service members and their spouses (under a program called TRICARE for Life) who will retire from the military and become eligible for Medicare (generally at age 65).

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Costs of Military Pay Have Been Increasing Faster Than the General Rate of Inflation and Wages and Salaries in the Private Sector

Over the past decade, the costs per active-duty service member in DoD’s military personnel account (which funds cash compensation and the accrual payments for retirees’ pensions and some of their health care) and the total costs for the military health care program have increased consistently, even with an adjustment for inflation in the general economy.

The upward trend in the military personnel account—which has increased at an average annual rate of 3.2 percent since 2000 (after adjusting for inflation)—is attributable primarily to a series of pay raises that exceeded the general rate of inflation and, in some years, the growth rate of private-sector wages and salaries.

Military Personnel Appropriation per Active-Duty Service Member

The costs of health benefits grew as a result of medical costs per beneficiary that escalated more rapidly than did either general inflation or increases in per capita costs for medical care—such as inpatient care, outpatient care, and pharmaceuticals—in the national economy. Finally, the Congress has established new medical benefits; in particular, TRICARE for Life “wraps around” Medicare benefits and substantially reduces out-of-pocket expenses for eligible beneficiaries.

Funding for the Military Health Care System by Category

DoD’s Fiscal Situation Has Changed As a Result of the Budget Control Act of 2011

CBO estimates that DoD’s funding for fiscal year 2013 will drop to $469 billion—about 11 percent below DoD’s request for the year—if all provisions of the Budget Control Act of 2011 are enforced, including sequestration (the automatic cancellation of a portion of budgetary resources). Future cuts will be substantial as well under current law. To meet those constraints, significant changes will be needed in military compensation, procurement of weapon systems, or both. This report, which focuses on military compensation, discusses several approaches that could be taken to curtail federal spending.

One possibility would be to restrict basic pay raises, as DoD has proposed for three of the next five years in its 2013 Future Years Defense Program, which was submitted to the Congress in April 2012. Although smaller pay raises could lead to fewer enlistments and faster attrition from the armed services, those consequences might be mitigated by increasing the availability of enlistment bonuses and selective reenlistment bonuses (the latter are offered to service members in hard-to-fill occupations). Alternatively—or in combination with restricting pay raises—DoD could reduce the number of active-duty military personnel more aggressively than the cumulative 5 percent cut currently planned between 2013 and 2017.

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Another approach might be to replace the current retirement system (under which active-duty members qualify for immediate benefits after 20 years of service) with a defined-benefit system that partially vests earlier in a member’s career, with a defined-contribution system under which DoD matches the service members’ contributions to a savings plan, or with some combination of the two systems. Those systems could cost less or more than the current system, depending on how they were structured and implemented, and savings might not be achieved for several years.

A third possible approach would be to restrain health care costs by making changes in enrollment fees, deductibles, copayments, or other aspects of current benefits. DoD has proposed various changes of this sort in its recent budget requests. Savings from some of those measures might be achieved immediately upon implementation.

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Long-Term Implications of the 2013 Future Years Defense Program

In most years, the Department of Defense (DoD) provides to the Congress a five-year plan, called the Future Years Defense Program (FYDP), along with its budget request for the coming year. Because decisions made in the near term can have consequences for the defense budget well beyond that period, CBO regularly examines the plans in DoD’s FYDP and projects their budgetary impact over the long term. This study analyzes the budgetary impact of the 2013 FYDP, which covers fiscal years 2013 to 2017, through 2030.

CBO projects that DoD’s plans will cost $123 billion, or 5 percent, more to execute through 2017 than DoD estimates. CBO also projects that the cost of DoD’s plans will exceed the limits established in the Budget Control Act.

The FYDP describes the department’s “base” budgetary plan—for its normal activities, such as manning, training, and equipping the military—and excludes overseas contingency operations, such as the war in Afghanistan and other nonroutine military activities elsewhere. Accordingly, CBO focused its analysis on DoD’s base-budget costs and produced two projections.

The first, the “CBO projection,” uses CBO’s estimates of cost factors and growth rates that reflect DoD’s experience in recent years. The second, the “extension of the FYDP,” starts with DoD’s estimates of the costs of the FYDP through 2017 and extends them beyond 2017 using DoD’s estimates where available and CBO’s projections of price and compensation trends for the overall economy where DoD’s estimates are not available. Neither projection should be viewed as a prediction of future funding; rather, the projections are estimates of the costs of executing the department’s current plans.

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What Is CBO’s Projection of the Costs of DoD’s Plans?

The CBO projection yields these conclusions (with all costs measured in 2013 dollars):

  • To execute its base-budget plans for 2013 through 2017, DoD would need appropriations totaling $53 billion (or 2.0 percent) more in real, or inflation-adjusted, terms than if funding for the base budget was held at the 2012 amount of $543 billion. For the entire projection period of 2013 through 2030, DoD’s base-budget plans would require appropriations totaling $1.2 trillion (or 12 percent) more than if funding for the base budget was held at the 2012 amount in real terms.
  • The primary cause of growth in DoD’s costs from 2013 to 2030 would be rising costs for operation and support (O&S), which accounts for 64 percent of the base budget in 2012. In particular, under DoD’s plans, there would be significant increases in the costs of military health care, compensation of the department’s military and civilian employees, and various operation and maintenance activities.
  • The costs of replacing and modernizing weapon systems would grow sharply during the next several years, from $168 billion in 2013 to $212 billion in 2018 in real terms—an increase of 26 percent. Acquisition costs would remain fairly steady at that level until 2025 before declining.
  • The growth in DoD’s costs would be less than the growth of the economy, so costs would decline as a share of gross domestic product (GDP). Spending for DoD’s base budget was 3.5 percent of GDP in 2010 and would decline to 3.0 percent of GDP in 2017 and to 2.5 percent in 2030.

Costs of DOD's Plans in the Context of the Budget Control Act

How Does CBO’s Projection Compare with a Projection Based on DoD’s Estimates of the Costs of the FYDP?

For most categories of DoD’s budget, costs under the CBO projection are higher than the costs estimated by DoD in the FYDP and the assumed costs for the extension of the FYDP. In particular, DoD’s costs of providing health care, paying military and civilian personnel, and developing and buying weapons have historically been higher than the department’s planning estimates. Over the FYDP period, CBO’s projection exceeds DoD’s estimates by a total of $123 billion, or 5 percent, in 2013 dollars.

How Does CBO’s Projection Compare with Funding Provided Under the Budget Control Act?

CBO compared its projection of the costs of executing DoD’s plans with the maximum funding levels that could be provided to the department under the Budget Control Act of 2011 (BCA), which limits discretionary appropriations through 2021. If DoD continues to receive its historical share of the national defense budget, CBO’s analysis yields these conclusions:

  • The cost of DoD’s base-budget plans for 2013 through 2021 is $508 billion higher in nominal terms than the funding that would be available to DoD under the BCA’s limits on discretionary appropriations for national defense before reductions due to that law’s automatic enforcement procedures.
  • The cost of DoD’s base-budget plans for 2013 through 2021 is $978 billion higher in nominal terms than the funding that would be available to DoD after the reductions due to the BCA’s automatic enforcement procedures, which are poised to take effect in January 2013.
  • For 2013, CBO’s projection of the cost of DoD’s plans is $14 billion higher than the funding that would be available under the BCA’s limits on discretionary appropriations for national defense before the BCA’s automatic reductions. Those costs would be $66 billion higher than the funding that would be available after the automatic reductions. Accommodating those reductions, in particular, could be difficult for the department to manage because it would have to be done over only nine months. Even with that cut, however, DoD’s base budget in 2013 would still be larger than it was in 2006 (in 2013 dollars) and larger than the average base budget during the 1980s.

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