The Hare And The Tortoise: Slowing The Growth in Military Pay, Benefits

Robert Hale, former budget god (comptroller) at the Pentagon, is good with numbers, especially defense budget numbers. And he speaks about them in clear, simply structured and well expressed English. Here he tackles one of the two or three thorniest issues facing the leadership of the US military: how to rein in the enormous growth in pay and benefits since 911 and still ensure the Pentagon can both attract and retain excellent people and also give them the best weapons to defend themselves with.

For the past five years, the Defense Department (DoD) has proposed ways to slow the growth in military pay and benefits. This does not mean military personnel are overpaid; you probably can’t pay someone enough to risk getting shot at. DoD sought these changes to free up funds to improve military readiness and modernization at the same time that it complied with mandatory budget limits. The slowdown can continue only so long as the military compensation package remains sufficiently competitive to attract and retain quality personnel.

Some critics assert that DoD has made little progress in slowing pay growth, largely because Congress has been unwilling to accept any significant changes. There certainly is more to do, especially with regard to military health care. However, significant progress has been made and — if pending legislation is approved — even greater progress will be realized.

If the military pay and benefits issue were a race between the hare and the tortoise, the hare would represent critics who swoop in with proposed far-reaching changes that may feature a reasonable rationale but have little chance of enactment. The tortoise represents a persistent Obama Administration that has pushed for changes that can become law, freeing up billions a year to improve military capabilities. The tortoise also represents a Congress that, while sometimes reluctant, has approved many of the Obama Administration changes and, in a few cases, has gone beyond them.

The Last Five Years

So what has the tortoise accomplished in the past five years?

Health care changes provided early savings. By fiscal 2011, the Obama Administration had allowed DoD – over the objections of the pharmaceutical industry — to use the federal ceiling price for pharmaceuticals, which substantially cut DoD costs. In the fiscal 2012 and 2013 National Defense Authorization bills, Congress permitted DoD to use Medicare rates to reimburse for outpatient care and for care at small hospitals. It also agreed to modest increases in fees for retirees who use TRICARE. Congress also permitted the military to restructure and raise pharmaceutical co-pays to encourage the use of cheaper generics and mail order delivery. Congress even went beyond the administration’s proposal and required that, during a five-year trial period, Medicare-eligible retirees must use mail order delivery for follow-on pharmaceuticals refills.

These and other changes saved about $3 billion a year, the Defense Department estimates. These savings will continue each year and will help to provide additional resources for long-term improvements in military readiness and modernization.

For fiscal 2014 and fiscal 2015, the Obama Administration proposed limiting military pay raises to 1 percent a year – less than the private-sector formula would have provided. Some in Congress did not support these limits, but Congress did not prohibit the president from using his existing authority to invoke them. For fiscal 2016, the administration has again proposed to limit the raise to 1.3 percent, compared with a 2.3 percent increase mandated by the formula. The Senate authorization bill supports this change, while the House bill does not. Neither bill prohibits President Obama from providing the lower raise, which therefore should go into effect.

Military Retirement Changes

These pay raise limits, when they are fully in effect, will save another $2 billion to $3 billion a year. Total savings will rise to $5 billion to $6 billion a year, which is getting to be real money.  Unless recruiting and retention falter, these savings will continue each year and can be used to improve military capabilities.

In legislation authorizing the fiscal 2016  budget, both the House and Senate have proposed changes in the military retirement system for future retirees, with changes going into effect in fiscal 2018. The changes are similar to the proposals by the Military Compensation and Retirement Modernization Commission, which issued its report last January. Both authorization bills reduce the size of pensions for future retirees who serve 20 or more years, but also provide almost all military members with a new 401(k)-like fund that includes matching government contributions. The administration has recently submitted a similar proposal, and Congress appears poised to take the lead and enact these changes.

Savings from these retirement changes will depend on final details. But the Commission estimated that savings to DoD would exceed $1 billion a year – increasing total funds made available for readiness and modernization over the next few years to more than $6 billion a year. (Note: DoD sets aside funds on an accrual basis to pay the retirement costs for future retirees, and it is these accrual charges that decline. For the next few years, costs to the government as a whole would increase, followed later by savings.)

The fiscal 2016 Senate authorization bill supports other administration proposals to slow the growth of pay and allowances. The House has not agreed to these changes. If it does, savings will rise yet again.

Next up? Neither body has addressed significant reform of the military health care system, which is needed to improve the system’s effectiveness and could provide additional savings.

Bottom line: there is still work to do but significant changes have been made. Just like in the children’s fable, the tortoise seems to be winning.

Robert Hale served as the Defense Department’s comptroller and CFO from 2009 to 2014. He is a Booz Allen Hamilton fellow.