You Ain't Seen Nothin' Yet

Members of the armed forces and their supporters are expressing shock and outrage over the Pentagon's request that Congress be "less generous" with future military pay raises.

As the Washington Post reported over the weekend, military leaders are concerned about the rising personnel costs, including military health care. They are concerned that the government's generosity is unsustainable, leaving the Pentagon (over the long run) without enough money for new weapons systems, or to repair equipment already in service.

Clifford L. Stanley, the undersecretary of defense for personnel, told a Senate committee in March that rising personnel costs could "dramatically affect the readiness of the department" by leaving less money to pay for operations and maintenance. Overall, personnel expenses constitute about one-quarter of defense spending.

Health care alone is projected to cost the military $51 billion next year, nearly one-tenth of the Pentagon's budget, excluding the costs of the wars in Iraq and Afghanistan. Since 2002, wages have risen 42 percent, compared with about 32 percent for the private sector. Housing and subsistence allowances, which troops receive tax-free, have gone up even more.

So far, efforts to limit future pay increases and other military benefits have been blocked by Congress. A bi-partisan majority--including members opposed to the wars in Iraq and Afghanistan--have awarded pay raises above those recommended by the administration. Congress is also fighting to ensure that the military's TRICARE health system will be excluded from the Obama Administration's health reform plan.

But the fiscal hand-writing is on the wall, and it's unclear how long Congress can ignore the administration's plan for pay and benefits. Personnel costs represent 25% of the nation's defense budget and roughly 10% of Pentagon spending goes for health care. Recent studies indicate that military health costs have exploded over the past decade, exceeding those in the private sector.

Those increases have prompted some administration officials (and a few members of Congress) to suggest increases in TRICARE premiums and co-pays, which have remained unchanged for more than a decade.

On the pay front, some officials believe that lower raises can actually be justified. They note that military pay has increased 42% since 2002, while wages in the private sector have gone up by 32%. Tax-free housing and subsistence allowances have seen even larger increases. That's why the Obama Administration (through Defense Secretary Robert Gates) is asking for just a 1.4% military pay increase next year.

But most of the arguments are disingenuous at best. True, military pay raises have out-stripped the private sector over the last decade. But that ignores the fact that members of the armed forces were at a compensation disadvantage for decades. In the late 1990s, a Pentagon study concluded that military personnel earned an average of 13% less than their counterparts in the private sector.

And for some highly-trained members of the armed forces (physicians, contracting officers and computer specialists, to name a few), the "gap" between their military paycheck--and what they could earn in the private sector--was even higher. That set the stage for substantial pay raises in the early years of the Bush Administration, trying to bring military compensation in line with the civilian world.

There are also questions about how the Pentagon (and the administration) are comparing military and private sector compensation. Their "typical" example cites an Army Sergeant (E-5) with one dependent who earns an average of $52,000 a year. But that package includes almost $17,000 in housing and subsistence allowances; the Sergeant's base pay is only $34,880 a year.

By comparison, a Postal Service letter carrier earns $80,000 a year in pay and benefits. Unlike his military counterpart, the postal worker isn't subject to frequent deployments, hazardous duty or frequent change-of-duty-station moves. And, as far as we can tell, no one is suggesting a cut in pay for employees of the USPS.

The health care argument is also a bit skewed. As we noted in a recent post, the TRICARE mess began in the mid-1990s, when the Clinton Administration elected to under-fund on-base health care facilities, which treated both active duty and retired personnel and their dependents. To fill the coverage gap, the Pentagon created TRICARE, an HMO-style arrangement that pushed most retirees into that system, with the promise of cost containment and similar savings.

But, as with other government-run health plans, oversight was lacking. Contractors for the various TRICARE regions changed frequently, and the Pentagon kept writing checks to cover their charges. Never mind that many physicians refused to participate in the system's "Cadillac plan" (TRICARE Prime), or that funding on-base facilities would have been much cheaper. As a former Surgeon General of the Air Force noted, a military hospital can perform an appendectomy for about $300; sending the same patient to a civilian hospital for the same procedure (under TRICARE) costs $6,000. Yet, no one is discussing a potential shift away from TRICARE.

If you sense something bigger behind the Pentagon's sudden austerity crusade, give yourself a Gold Star for perception. New-found concerns about personnel and health care costs are simply stalking horses for much larger military budget wars that are on the horizon. In a highly-publicized speech on Saturday, Defense Secretary Robert Gates renewed his call for Pentagon belt-tightening, warning that "dramatic measures" will be required just to sustain current force levels.

In other words, brace yourselves for massive decreases in military spending as the War in Iraq winds down and we begin our withdrawal from Afghanistan in 2011. No one's saying how much of a hit the Pentagon will take, but we've filed away a copy of a 2009 Congressional Budget Office (CBO) study that provided an "alternative" strategy for Pentagon procurement. The study outlined potential cost savings of roughly $500 billion (over a 16-year period) by cancelling or down-sizing various weapons programs. The plan was produced under the auspices of former CBO Director Peter Orszag; he is currently President Obama's budget director.

Clearly, Mr. Orszag has some ideas about military spending that don't include substantial increases. In fact, we'd guess that the OMB Director has already set rough parameters for future Pentagon budgets, and the numbers are grim. By trying to contain personnel costs, the military hopes to free up money for weapons programs that might (otherwise) be cancelled. While personnel and procurement represent separate accounts, the funding still comes from the same pile, and it can be easily shifted from one category to the other.

A case in point? During the mid-1990s, the Air Force reduced its ranks by 10,000 personnel. The "savings" were used to fund development of the F-22 Raptor, which was seriously over budget. The additional money kept the program going, but the down-sizing produced a predictable consequence: by the time the Raptor became operational, the USAF was noting a drop in experience levels in certain career fields. Some of the airmen projected to serve as experienced technicians and mid-level supervisors had left the service years earlier, part of the forced exodus mandated to "save" the F-22.

This time around, we're predicting more draconian measures. With our pull-out from Iraq and Afghanistan, look for major cuts in ground forces, i.e., those "additional" Army brigades and Marine Corps regiments added just a couple of years ago. Ground units are extremely expensive and require large numbers of personnel. The potential "cost savings" from that sort of reduction must be tantalizing to Mr. Orszag and his associates.

Look for key weapons programs to get the axe as well. The 2009 OMB study recommended elimination of the Air Force's next-generation tanker (KC-X) and major cuts in weapons systems that survive, including the Joint Strike Fighter. Look for elimination of at least one Navy carrier battle group--and possibly more. Just last week, Dr. Gates questioned the need for "so many" carriers, claiming our sea power "over-match" potential foes.

On the benefits side, look for smaller and less frequent pay increases for active duty personnel and a similar trend in retiree COLAs. In fact, the co-chairman of the President's Debt Commission, former Wyoming Senator Alan Simpson, has publicly stated that he doesn't believe cost-of-living-adjustments are part of the benefits originally promised to military members. You can also expect higher premiums and co-pays for TRICARE. Never mind that the "typical" armed forces retiree is an E-6 who will receive about $1,800 a month. For someone in that category, TRICARE increases will create a major financial burden.

But those are just the first steps. DoD has the option of pushing retirees and dependents into the public option (imagine how much that would "save") and various politicians have suggested other "fixes" for military benefits, ranging from the delay of pension payments until age 62 for all personnel, to a "means test" for armed forces retirees who want to collect social security. In other words, if your military pension is above a certain level, your social security benefit will be reduced.

When it comes to potential reductions in military benefits, the worst is yet to come.