Do we overpay the members of our armed services?

Summary: As the vise tightens on government spending, even DoD will feel the pressure. History suggests that DoD’s leaders will consider military pay and benefits as high on the list of expenses to cut. A recent think-tanks hints as much.

Mackenzie Eaglen wrote a major paper for the Heritage Foundation: “U.S. Defense Spending:
The Mismatch Between Plans and Resources“, June 2010. He lists ways to fix the US military’s “mismatch between plans and resources”. He recommends that the government “align military compensation with 21st century workforce demands”. Specifically, change the mix of compensation and “reform military health care.” While charmingly vague about how this reduces the military’s funding gap, anyone familiar with such actions in corporations know the result: reduced pay and benefits for employees.

Let’s venture when Eaglen dares not go. Do we overpay the members of our armed services? As government borrowing skyrockets — fighting two wars during a recession — our leaders scramble for savings, and have not overlooked military pay. It’s tempting, since (unlike defense contractors), people in uniform seldom make large campaign contributions. So they’ve commissioned several studies. No luck so far for desperate politicos; all these 7 of the studies shown below conclude that military compensation is appropriate, even when examined from several perspectives.

(1) Three recent summary reports, which taken together tell the story

(a) “Evaluating Military Compensation“, Carla Tighe Murray, CBO, 28 April 2010 –Current pay levels are reasonable. Excerpt:

A broader measure of cash compensation — called regular military compensation (RMC) — consists of basic pay plus service members’ basic allowances for housing and subsistence, as well as the tax advantage that arises because those allowances are not subject to federal income taxes. … CBO estimated that {in 2006} average RMC exceeded the 75th percentile of earnings for civilians with some college education, surpassing DoD’s goal {70%}. Lawmakers have continued to authorize military pay raises that exceed the average rise in civilian wages and salaries, so those measures of military compensation would probably match higher percentiles of civilian earnings today… Other studies of cash and noncash compensation have reached similar conclusions.

(b) “Comparisons between Military and Civilian Compensation Can be Useful, but Data Limitations Prevent Exact Comparisons“, testimony of Brenda S. Farrell, GAO, 28 April 2010 — Current pay levels work well. Excerpt:

While comparisons between military and civilian compensation are important management measures, they alone do not necessarily indicate the appropriateness or adequacy of compensation. Another measure is DOD’s ability to recruit and retain personnel. We have reported in the past that compensation systems are tools used for recruiting and retention purposes. Similarly, in 2009, CBO stated that ultimately, the best barometer of the effectiveness of DOD’s compensation system is how well the military attracts and retains high-quality, skilled personnel.

Since 1982, DOD has only missed its overall annual recruiting target three times — in 1998 during a period of very low unemployment, in 1999, and most recently in 2005. Given that (1) the ability to recruit and retain is a key indicator of the adequacy of compensation and (2) DOD has generally met its overall recruiting and retention goals for the past several years, it appears that regular military compensation is adequate at the 70th percentile of comparable civilian pay as well as at the 80th percentile when additional benefits are included.

(c) “Questions for the Record Related to Military Compensation“, GAO, 3 June 2010 — The current compensation is structured well (but not perfect). Excerpt:

DOD’s current retirement system {20 year cliff vesting} is meant to create a strong incentive for military personnel who stay beyond 8 to 10 years to complete 20 years and leave soon thereafter. Specifically, under DOD’s current retirement system, according to the department’s Office of the Actuary, only 15% of enlisted and 47% of officers become eligible to receive retirement under the current plan that requires 20 years of service to vest.

(2) Here’s a few of the larger report most of the above draw upon

(a) “A Look at Cash Compensation for Active-Duty Military Personnel“, RAND, 2002 (65 pages) — Excerpt of conclusions:

The main conclusion stemming from our analysis is the high degree of similarity in cash compensation among military personnel at each year of service, regardless of branch of service or occupational group. In other words, although pay grows over a military career, pay is remarkably similar among personnel at the same year of service. A few notable exceptions exist, such as officers in the medical, aviation, and nuclear fields who receive S&I pays and bonuses that substantially increase their average compensation. Apart from these exceptions, equity in compensation seems to prevail. Thus, despite the large number of S&I pays, they play a relatively small role in determining average total cash compensation.

… These similarities in compensation across personnel and the similarities in the promotion systems provide tangible evidence of the military’s commitment to equity of pay opportunities—regardless of skill area. Nonetheless, that equity results in remarkable similarity in the retention profiles of personnel across the services and across occupational groups. In other words, the experience mix of occupational groups varies relatively little within each service, despite the enormous diversity in the skill requirements and duties of the personnel in these groups. Further, although notable differences exist in the experience mix across the services, with the Marine Corps having a more junior force and the Air Force having a more senior force, the similarities in the experience mixes of personnel in the different services are also notable. To the extent that the services would like to achieve more variable career lengths and more diversity in the experience mix of different occupations, the analysis in this report suggests that greater differentiation in military pay and changes in the structure of military compensation may be required.

(b) “Evaluating Military Compensation“, Congressional Budget Office, June 2007 (44 pages) — Excellent summary of previous research. Excerpt:

To attract and retain the military personnel it needs, the Department of Defense (DoD) must offer a competitive compensation package—one that adequately rewards service members for the rigors of military life. After reenlistment rates declined in the late 1990s, lawmakers and DoD began increasing cash and noncash elements of military compensation. In 2000, for example, they authorized that basic pay for service members would rise 0.5 percentage points faster than wages in the civilian sector through 2006. Housing allowances and other compensation were also increased. As a result, the Congressional Budget Office (CBO) estimates, regular military compensation adjusted for inflation — 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 21% for the active-duty enlisted force as a whole between 2000 and 2006.

This study looks at compensation for the 83% of active-duty U.S. service members who are enlisted personnel. It considers various ways to measure military compensation and examines common methods of — and problems with — comparing that compensation with pay and benefits in the civilian sector. The analysis also explores the connection between the components of military compensation and the military’s recruiting and retention of personnel. Finally, the study discusses possible options to make the military compensation system visible to service members and decisionmakers and more efficient.

(c) “Comparing Military and Civilian Compensation Packages“, James E. Grefer, CNA, March 2008 (128 pages) — Excerpt:

We first compared military and civilian cash compensation, in the traditional way. Regular Military Compensation (RMC) for enlisted is compared with the 70th percentile earned income of full-time, full-year civilian workers who have some college or an Associate degree. We used civilian ages 21 to 40 to represent years of service (YOS) 1 through 20. For officers, we compared RMC with cash earnings of civilians who have a Bachelor degree or better from ages 23 to 42.

… We add the value differences of these three important benefits {health care, taxes, retirement} to Regular Military Compensation (RMC), and call this amount “Military Annual Compensation” or “MAC”. … As a result, we found that MAC compares favorably with the cash compensation of the 80th percentile of officer and enlisted equivalent civilians.

(d) “Military Personnel: Military and Civilian Pay Comparisons Present Challenges and Are One of Many Tools in Assessing Compensation“, GAO, 1 April 2010 (54 pages) — Farrell’s 2010 testimony repeats the conclusions of this report.

(3) Afterword and contact info