Congressional Budget Office January 14, 2020 Approaches to Changing - PowerPoint PPT Presentation

Congressional Budget Office January 14, 2020 Approaches to Changing Military Compensation Presentation to the Military Manpower Roundtable Carla Tighe Murray Consultant to CBO and former Senior Analyst

CBO CBO’s Findings  Cash compensation for military personnel exceeds the 70th percentile of earnings for comparable civilians, often by a significant amount.  Military compensation is more heavily weighted toward noncash and deferred benefits than civilian compensation is, which further increases its relative value.  If DoD’s overall budget remains flat over the next few years and military end strength adheres to the department’s plans, then spending on pay and benefits will reduce DoD’s ability to fund other needs, such as modernization or readiness.  DoD could implement approaches to slow the growth of spending on personnel while still attracting and retaining a high-quality force. 1

CBO The Costs of DoD’s Plans Grow by 13 Percent Between 2020 and 2034 in CBO’s Projections Source: Congressional Budget Office, Long-Term Implications of the 2020 Future Years Defense Program (August 2019), www.cbo.gov/publication/55500. FYDP = Future Years Defense Program. 2

CBO Most of the Increase in the Costs of DoD’s Plans Would Be in Operation and Support Source: Congressional Budget Office, Long-Term Implications of the 2020 Future Years Defense Program , August 2019, www.cbo.gov/publication/55500. FYDP = Future Years Defense Program. 3

CBO Major Elements of Military Compensation and DoD’s Current Funding  DoD’s funding for military compensation  When deferred compensation is measured totaled $170 billion in 2019: on an accrual basis, the average service member’s compensation consists of about – $90 billion for cash compensation; 55 percent cash and 45 percent noncash – $44 billion for current noncash benefits, and deferred benefits. including health care, commissaries, – Estimated total compensation for the and so forth; median enlisted service member in – $25 billion for the accrued liability for 2018 was $112,800. future retirement benefits; and – Estimated total compensation for the – $11 billion for health care for current median officer in 2018 was $183,100. retirees.  Funding for the Department of Veterans Affairs totaled $191 billion in 2019 for former service members. The median enlisted service member holds the rank of E-4 (for example, an Army corporal or specialist), and the median commissioned officer holds the rank of O-3 (for example, an Army captain). 4

CBO The Policy Approaches That CBO Analyzed  Two approaches that would change cash  Three approaches that would reduce compensation: noncash or deferred compensation: – Substitute bonuses for a portion of – Close selected schools run by DoD and annual increases in basic pay offer cash vouchers instead – Institute a salary system – Eliminate the transferability of Post-9/11 GI Bill benefits – Increase the share of health care costs paid by military retirees and their families For more information, see Congressional Budget Office, Approaches to Changing Military Compensation (January 2020), www.cbo.gov/publication/55648. 5

CBO Historical Interaction Between Recruitment, Deployment, and the Economy 6

CBO Deplo Deployed ed P Per erson sonne nel l an and d the the U Une nemplo mployme yment Ra nt Rate te Force deployments and the economy can interact to make recruiting more challenging. The Department of Defense faced significant challenges between 2004 and 2007. 7

CBO Sh Shar are e of of A Activ ctive-Duty Duty En Enli listed sted R Rec ecruits uits Consider Cons idered ed Hi High gh Q Qua uali lity ty, , Se Selecte lected d Yea ears In general, the share of active-duty enlisted recruits who are considered high quality — who have a high school diploma and scored above average on the Armed Forces Qualification Test — has grown over time. The Army saw quality drop substantially in 2007, although it has since rebounded. 8

CBO Sh Shar are e of of Enlisted P Enlisted Per erson sonne nel l Who ho R Rema emain i in in n the the M Mil ilitar itary, , by Y by Yea ears s of of Ser Service vice Most enlisted personnel leave active duty after one or two terms of service. An average term lasts about four years but can range from two years to six years. 9

CBO How Military Cash Compensation Compares With Civilian Earnings 10

CBO ns , , by Comp Compen ensa sation tion for or Enli Enliste sted d Per erson sonne nel l Rela elativ tive e to to Cash Cash Ear Earning nings s for or Civi Civilia lians by Yea ears of s of Expe Experien rience ce, , 20 2018 18 RMC for enlisted personnel approximates the cash earnings of the 90th percentile of male civilian workers with comparable years of experience and some college education. Regular military compensation (RMC) includes basic pay, allowances for housing and food, and the federal tax advantage because those allowances are not taxed. Civilian earnings data are for male full- time nonagricultural workers with some college (including an associate‘s degree). 11

CBO Comp Compen ensa sation tion for or Commissione Commissioned d Of Officer ficers s Rela elativ tive e to to Cash Cash Ear Earning nings f s for or Ci Civil vilian ans, s, by Y by Yea ears of s of Expe Experien rience ce, , 20 2018 18 RMC for officers generally exceeds the cash earnings of the 70th percentile of male civilian workers with a bachelor’s degree and comparable years of experience. Regular military compensation (RMC) includes basic pay, allowances for housing and food, and the federal tax advantage because those allowances are not taxed. Civilian earnings data are for male full-time nonagricultural workers with a four-year degree. 12

CBO The Estimated Mix of Cash and Noncash/Deferred Compensation 13

CBO Esti Estima mate ted d Comp Compen ensa sation tion for or a a Ser Service Membe vice Member r Holding Holding th the Ran e Rank of k of E-4, 4, 20 2018 18 About 47 percent of the estimated value of total compensation for the median enlisted service member is made up of noncash and deferred benefits. E- 4 is the median rank in the enlisted force. “Other Noncash” includes commissaries, child care, and other on -base amenities. Re tirement and veterans’ benefits are estimated on an accrual basis, incorporating the probability of a service member’s reaching retirement. 14

CBO Esti Estima mate ted d Comp Compen ensa sation tion for or an Of an Officer ficer Holding Holding th the Ran e Rank of k of O-3, 3, 20 2018 18 For the median officer, noncash and deferred benefits constitute 45 percent of total military compensation. O- 3 is the median rank in the commissioned officer corps. “Other Noncash” includes commissaries, child care, and other on -base a menities. Retirement and veterans’ benefits are estimated on an accrual basis, incorporating the probability of a service member’s reaching retirement. 15

CBO Advantages and Disadvantages of Changing to a Greater Reliance on Cash Compensation  Advantages  Disadvantages – The value of cash benefits is more – Deferred benefits (particularly easily recognized by potential recruits, retirement benefits) encourage people current service members, and to stay for an entire career. policymakers; reducing the number of – An experienced force is more types of cash pay would make that productive, improving military recognition even easier. readiness. – Most service members leave after one – Retaining an experienced, motivated, or two terms and do not receive and more productive force is crucial to retirement annuities. military readiness. – Greater reliance on cash allows more – Retention could suffer if service immediate rewards for good members were expecting those benefits performance. to persist in the future. 16

CBO Approaches That CBO Examined 17

CBO Two Approaches That Would Change Cash Compensation  Substitute bonuses for some of the  Institute a salary system by incorporating housing increases in basic pay and food allowances into basic pay – Bonuses could be targeted to people in – A salary system could give service members a particular ranks or occupations, whereas more complete view of what they earn and a pay raise would be received by all. would better link military compensation to job performance. – Smaller pay raises would help DoD – Bonuses could still be used to recruit and retain return to its 70th percentile benchmark. people with specific skills or occupations. – Bonuses would not affect other elements – Cash pay would be unaffected by marital status of compensation (like retirement pay), reducing DoD’s future funding needs. or family size, making it more like civilian packages. – Smaller pay raises could hamper – Such a system might lead to improved recruitment and retention unless the bonuses were maintained. recruitment and retention of people without dependents. – Most service members would receive – DoD’s funding for personnel could rise less compensation over time than under the current system. significantly (or not) depending on how the new policy was implemented. 18