CBO Congressional Budget Office : Approaches to Changing Military Compensation

To attract and retain high-quality military personnel, assign them to needed occupations, and motivate them to perform their best, the Department of Defense (DoD) must offer a compensation package that adequately rewards service members for the rigors of military life. Compensation for military personnel is a mix of cash earnings and noncash, or in-kind, benefits received while they are serving, as well as the deferred pay and benefits they may receive after leaving-or separating, in military parlance. To fund those elements of military compensation for current and former personnel, DoD and the Department of Veterans Affairs together expected to spend about $350 billion in 2019.

Researchers have found that an increase in cash compensation increases the supply of high-quality enlisted recruits and boosts retention. Researchers have also found that bonuses are cost-effective tools for attracting and retaining personnel in hard-to-fill occupations.

This analysis considers compensation for the approximately 1.3 million active-duty U.S. service members (about 1 million enlisted personnel and 230,000 warrant and commissioned officers). It compares that compensation with pay and benefits in the civilian sector and presents some options for changing the compensation system. Ultimately, the system must be assessed on its ability to attract, retain, and motivate personnel of the necessary quality at the lowest possible cost.

What Are the Components of Military Compensation and What Are the Trends Over Time?

Current cash pay, which includes basic pay and allowances such as those for housing and food, typically accounts for slightly more than half of a service member's compensation. Basic pay varies by pay grade, and housing and food allowances vary by pay grade and the number of dependents. Current cash pay also includes additional cash earnings, such as lump-sum bonuses and monthly compensation for a specific occupation or duty. Current noncash benefits include family health care, schools for dependent children, and other programs, such as child care and discount groceries. Deferred cash pay includes retirement pay and disability compensation. Deferred noncash benefits include veterans' health care, educational programs, and vocational programs.

Cash compensation grew significantly during the past two decades, but that growth has slowed in recent years. For example, regular military compensation, or RMC- basic pay, allowances for food and housing, and the tax advantage that arises because those allowances are not subject to federal income tax-grew by 20 percent for the active-duty force as a whole between 2002 and 2018 after adjusting for inflation. But lawmakers increased basic pay by less than the rate of increase for civilian wages from 2014 through 2016 and authorized DoD to slightly reduce housing allowances. Also, in 2016, the Congress authorized the creation of a new retirement system-the Blended Retirement System. In contrast with the previous retirement system, the Blended Retirement System provides for earlier vesting of some retirement benefits, adds a defined contribution component, and shifts some benefits from deferred to cash compensation (in the form of bonuses for remaining in the military).

How Do Military and Civilian Compensation Compare?

To determine the competitiveness of its pay, DoD sets a benchmark goal: RMC for service members should be approximately equal to the 70th percentile of wages and salaries for comparable civilians.In CBO's estimation, cash compensation, including nontaxable housing and food allowances, exceeds DoD's benchmark in almost all cases (often by a large margin) for civilian workers of similar ages and education levels. CBO also found that total military compensation is weighted more heavily toward noncash and deferred benefits than civilian compensation packages. That structure promotes the financial security of service members, particularly in retirement. However, noncash benefits are valued less highly by young people and by those living away from military installations, and many deferred benefits accrue only to the small minority of service members who complete a military career.

What Approaches Did CBO Examine to Change Compensation?

CBO examined five approaches that would alter military compensation to address those issues. The approaches are divided into two groups: those that would change the makeup of cash compensation, and those that would reduce noncash or deferred compensation.

Approaches to Changing Cash Compensation
CBO examined two approaches that would change cash compensation: bonuses and salaries.

Bonuses. Substituting bonuses for some of the increase in basic pay would offer several advantages. Bonuses could be targeted to people in particular ranks or occupations (instead of affecting all military personnel, like a pay raise would). They would permit the military to address specific problems in recruitment and retention (for example, a shortage of aircraft maintenance personnel), so staffing issues could be solved more efficiently. In addition, smaller pay increases would reduce spending in future years and help DoD move toward its 70th percentile benchmark, because bonuses do not compound the way basic pay raises do and they do not affect other components of compensation (such as retirement pay). Finally, they would allow DoD greater flexibility to address pay discrepancies between the military's various branches.

One disadvantage of bonuses is that service members as a group would see their basic pay grow more slowly in future years than it otherwise might. Unless the bonus program was continued and increased in size year after year (which might not be necessary, depending on other recruitment and retention issues), that slowdown might affect motivation and retention at some point.

Salaries. Under a salary system, the three elements of RMC would be replaced with a single component of cash pay. (DoD would still use occupation-specific pay or bonuses to recruit and retain certain personnel, however.) Instituting a salary system would not necessarily slow the growth of future spending, but it would give policymakers and service members a more complete view of the amount of cash pay that military personnel earn. Such a system would be more similar to pay packages in the civilian sector because salaries would be based on members' duties and responsibilities. Cash pay would be linked only to job performance and would no longer be affected by a service member's family size or marital status.

A salary system would boost cash pay for service members who are single, particularly young members living in barracks. Raising their cash pay would encourage those members to stay in the military longer, in part because it would compensate them for the hardship of residing in barracks (one of the least attractive aspects of military life, according to surveys). Some service members might be worse off, however, and transitioning to a new salary system would be complicated. Some observers argue against changing a system that has worked satisfactorily for decades.

Approaches to Reducing Noncash or Deferred Compensation
CBO examined three approaches that would reduce noncash or deferred compensation:

• Closing elementary and secondary schools run by DoD in the United States and providing cash allowances to the affected families,
• Eliminating the Post-9/11 GI Bill educational benefits currently provided to spouses and children of service members, and
• Increasing out-of-pocket costs paid by military retirees for their DoD health plan.

Reducing noncash and deferred benefits relative to cash benefits would make the compensation system more efficient because the value of cash benefits is more easily recognized by potential recruits, current service members, and policymakers, and such benefits give people more choices about how to spend their pay. In addition, because most military personnel do not receive the benefits that accrue to retirees, a system weighted more heavily toward cash compensation would be valued more highly by many service members and thus could be more effective in recruiting and retaining personnel than an extensive noncash system would be.