Military Personnel
DOD Needs to Improve the Transparency and Reassess the Reasonableness, Appropriateness, Affordability, and Sustainability of Its Military Compensation System Gao ID: GAO-05-798 July 19, 2005Over the years, the Department of Defense's (DOD) military compensation system has become an increasingly complex and piecemeal accretion of pays, allowances, benefits, and special tax preferences. DOD leaders have expressed concern that rising compensation costs may not be sustainable in the future and could crowd out other important investments needed to recapitalize equipment and infrastructure. Given the looming fiscal challenges facing the nation in the 21st century, GAO believes it is time for a baseline review of all federal programs to ensure that they are efficiently meeting their objectives. Under the Comptroller General's authority, GAO (1) assessed whether DOD's approach to compensation provides adequate transparency over costs; (2) identified recent trends in active duty compensation, and how costs have been allocated to cash and benefits; and (3) reviewed how active duty servicemembers perceive their compensation and whether DOD has effectively explained the value of the military compensation package to its members.
DOD's historical piecemeal approach to military compensation has resulted in a lack of transparency that creates an inability to (1) identify the total cost of military compensation to the U.S. government and (2) assess the allocation of total compensation investments to cash and benefits. No single source exists to show the total cost of military compensation, and tallying the full cost requires synthesizing about a dozen information sources from four federal departments and the Office of Management and Budget. Without adequate transparency, decision makers do not have a true picture of what it costs to compensate servicemembers. They also lack sufficient information to identify long-term trends, determine how best to allocate available resources to ensure the optimum return on compensation investments, and better assess the efficiency and effectiveness of DOD's current compensation system in meeting recruiting and retention goals. To address this and other major business transformation challenges in a more strategic and integrated fashion, GAO recently recommended the creation of a chief management official at DOD. Transparency over military compensation is critical because costs to provide compensation are substantial and rising, with over half of the costs allocated to noncash and deferred benefits. In fiscal year 2004, it cost the federal government about $112,000, on average, to provide annual compensation to active duty enlisted and officer personnel. Adjusted for inflation, the total cost of providing active duty compensation increased about 29 percent from fiscal year 2000 to fiscal year 2004, from about $123 to $158 billion. During this time, health care was one of the major cost drivers, increasing 69 percent to about $23 billion in fiscal year 2004. In addition, military compensation is weighted more toward benefits compared with other government and private sector civilian compensation systems. Furthermore, less than one in five service members will serve 20 years of active duty service to become eligible for retirement benefits. Increasing compensation costs make the need to address the appropriateness and reasonableness of the compensation mix and the long-term affordability and sustainability of the system more urgent. DOD survey results and analysis of GAO focus groups and survey data have shown that servicemembers are dissatisfied and harbor misperceptions about their pay and benefits in part because DOD does not effectively educate them about the competitiveness of their total compensation packages. About 80 percent of the 400 servicemembers that GAO surveyed believed they would earn more as civilians; in contrast, a 2002 study showed that servicemembers generally earn more cash compensation alone than 70 percent of like-educated civilians. Servicemembers also expressed confusion over aspects of their compensation, like retirement, and many complained that benefits were eroding despite recent efforts by Congress and DOD to enhance pay and benefits. By not systematically educating servicemembers about the value of their total compensation, DOD is essentially allowing a culture of dissatisfaction and misunderstanding to perpetuate.
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Director: Team: Phone:GAO-05-798, Military Personnel: DOD Needs to Improve the Transparency and Reassess the Reasonableness, Appropriateness, Affordability, and Sustainability of Its Military Compensation System
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Report to Congressional Committees:
July 2005:
Military Personnel:
DOD Needs to Improve the Transparency and Reassess the Reasonableness,
Appropriateness, Affordability, and Sustainability of Its Military
Compensation System:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-798]:
GAO Highlights:
Highlights of GAO-05-798, a report to congressional committees:
Why GAO Did This Study:
Over the years, the Department of Defense‘s (DOD) military compensation
system has become an increasingly complex and piecemeal accretion of
pays, allowances, benefits, and special tax preferences. DOD leaders
have expressed concern that rising compensation costs may not be
sustainable in the future and could crowd out other important
investments needed to recapitalize equipment and infrastructure. Given
the looming fiscal challenges facing the nation in the 21st century,
GAO believes it is time for a baseline review of all federal programs
to ensure that they are efficiently meeting their objectives. Under the
Comptroller General‘s authority, GAO (1) assessed whether DOD‘s
approach to compensation provides adequate transparency over costs; (2)
identified recent trends in active duty compensation, and how costs
have been allocated to cash and benefits; and (3) reviewed how active
duty servicemembers perceive their compensation and whether DOD has
effectively explained the value of the military compensation package to
its members.
What GAO Found:
DOD‘s historical piecemeal approach to military compensation has
resulted in a lack of transparency that creates an inability to (1)
identify the total cost of military compensation to the U.S. government
and (2) assess the allocation of total compensation investments to cash
and benefits. No single source exists to show the total cost of
military compensation, and tallying the full cost requires synthesizing
about a dozen information sources from four federal departments and the
Office of Management and Budget. Without adequate transparency,
decision makers do not have a true picture of what it costs to
compensate servicemembers. They also lack sufficient information to
identify long-term trends, determine how best to allocate available
resources to ensure the optimum return on compensation investments, and
better assess the efficiency and effectiveness of DOD‘s current
compensation system in meeting recruiting and retention goals. To
address this and other major business transformation challenges in a
more strategic and integrated fashion, GAO recently recommended the
creation of a chief management official at DOD.
Transparency over military compensation is critical because costs to
provide compensation are substantial and rising, with over half of the
costs allocated to noncash and deferred benefits. In fiscal year 2004,
it cost the federal government about $112,000, on average, to provide
annual compensation to active duty enlisted and officer personnel.
Adjusted for inflation, the total cost of providing active duty
compensation increased about 29 percent from fiscal year 2000 to fiscal
year 2004, from about $123 to $158 billion. During this time, health
care was one of the major cost drivers, increasing 69 percent to about
$23 billion in fiscal year 2004. In addition, military compensation is
weighted more toward benefits compared with other government and
private sector civilian compensation systems. Furthermore, less than
one in five service members will serve 20 years of active duty service
to become eligible for retirement benefits. Increasing compensation
costs make the need to address the appropriateness and reasonableness
of the compensation mix and the long-term affordability and
sustainability of the system more urgent.
DOD survey results and analysis of GAO focus groups and survey data
have shown that servicemembers are dissatisfied and harbor
misperceptions about their pay and benefits in part because DOD does
not effectively educate them about the competitiveness of their total
compensation packages. About 80 percent of the 400 servicemembers that
GAO surveyed believed they would earn more as civilians; in contrast, a
2002 study showed that servicemembers generally earn more cash
compensation alone than 70 percent of like-educated civilians.
Servicemembers also expressed confusion over aspects of their
compensation, like retirement, and many complained that benefits were
eroding despite recent efforts by Congress and DOD to enhance pay and
benefits. By not systematically educating servicemembers about the
value of their total compensation, DOD is essentially allowing a
culture of dissatisfaction and misunderstanding to perpetuate.
What GAO Recommends:
GAO is making a number of recommendations to improve the transparency,
reasonableness, appropriateness, affordability, and sustainability of
the military compensation system. DOD generally concurred with GAO‘s
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-05-798.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Derek Stewart at (202)
512-5559 or stewartd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOD's Compensation System Lacks Transparency to Identify Total Costs
and How Compensation Is Allocated:
Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human
Capital Goals or Not Sustainable in the Long Term:
DOD's Lack of an Effective Communication and Education Effort on
Compensation Has Allowed Servicemembers' Misperceptions and Concerns
about Their Compensation to Perpetuate:
Conclusions:
Recommendations for Executive Action:
Matter for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Sample of a Personal Statement of Military Compensation:
Appendix III: Comments from the Department of Defense:
Appendix IV: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Total Costs to Provide Active Duty Servicemembers Compensation
(Source and Types):
Table 2: Summary of Changes in Compensation Costs, Fiscal Years 2000
and 2004:
Table 3: Composition of Focus Groups:
Figures:
Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal Years
2000-2004:
Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation
Costs per Active Duty Servicemember in Fiscal Year 2004:
Figure 3: 2003 Mix Salary/Wages and Benefits in Civilian Compensation:
Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 20-
Year Career:
Figure 5: Reasons for Servicemembers' Dissatisfaction with Pay and
Benefits:
Abbreviations:
DHP: Defense Health Program:
DOD: Department of Defense:
MEPS: Medical Expenditures Panel Survey:
VA: Department of Veterans Affairs:
Letter July 19, 2005:
Congressional Committees:
The military compensation system has had the same basic structure since
the end of World War II, but over time, it has become a complex and
piecemeal culmination and accretion of pay, benefits, and special tax
preferences--each designed to meet a specific need in managing an
evolving force. Today, the total military compensation package includes
dozens of pays and allowances; several noncash benefits to take care of
troops who, increasingly, are married with children; certain
preferences; as well as lifetime retirement pay and health care for
retirees and their families. Valuing military service is complicated.
Serving in the military offers personal and professional rewards but
also requires many sacrifices--frequent moves and jobs that are arduous
and sometimes dangerous. Moreover, military culture is paternalistic,
and servicemembers expect the United States to take care of them and
their families as reward for their service. Since the late 1990s, the
Department of Defense (DOD) and Congress have sought to improve
military pay to make it more competitive. Congress has improved
benefits by repealing the unpopular REDUX retirement system in 1999 and
expanding health coverage to cover retirees and their families for life
in 2002, among other enhancements.[Footnote 1] Even with these efforts,
however, reports of dissatisfaction with some pays and benefits among
military members still abound, and public perceptions linger that
enlisted military members and their families are living in poverty.
In recent years, Congress has taken steps to fund enhanced compensation
and benefit programs for active duty and reserve personnel at a time
when many military personnel are spending months or years away from
home, often in harm's way, as the nation is heavily engaged in the war
on terrorism. Moreover, as of 2005 DOD's budget had grown to nearly
half a trillion dollars, including supplemental funding to support
activities related to fighting terrorism. In our recent report on the
challenges facing the United States in the 21st century, we expressed
concerns about whether the current trends are both affordable and
sustainable.[Footnote 2] Many federal programs--such as military
compensation--were designed decades ago to address earlier challenges
related to labor markets, security conditions, organizational
structures, and compensation strategies of prior eras. Some DOD leaders
have expressed similar concerns, specifically that the increasingly
expensive compensation system could crowd out other important
investments needed to recapitalize aging defense-related equipment and
infrastructure. Moreover, DOD leaders are particularly concerned about
the growth in compensation entitlements--such as health care and
concurrent receipts for disability and retirement--that do not have a
significant impact on recruiting and retention. In 2005, the
compensation debate was reopened when mounting concerns within the
department about the growth in compensation cost--and the limited
management flexibility afforded by the current system--led the
Secretary of Defense to form a committee to comprehensively assess the
approach the department uses to compensate its personnel.
Given the nation's increasing fiscal imbalance, we believe it is time
for a baseline review of all major federal programs and polices,
including military compensation, to ensure that they are efficiently
and effectively meeting their objectives and well adapted to 21st
century realities. We recognize that this will not be a simple or easy
process and careful consideration must be given to any compensation
changes because the stakes are high. We are convinced, however, that
this reexamination offers compelling opportunities to both redress our
current and projected fiscal imbalance while better positioning
government to meet the new challenges and changing expectations of the
21st century.
In light of the above and under the statutory authority of the
Comptroller General, we (1) assessed whether DOD's current approach to
military compensation provides adequate transparency over total costs
to the federal government; (2) identified the recent trends in active
duty military compensation costs, and how compensation has been
allocated to cash and benefits; and (3) reviewed how active duty
servicemembers perceive their compensation and whether DOD has
effectively explained the value of the military compensation package to
its members.
In conducting this review, we limited our scope to the compensation
system for active duty military personnel. Numerous methods were used
to gather and assess information for this work. We reviewed
congressional justification budget books for DOD as well as the
Department of Veterans Affairs (VA). We calculated the federal tax
expenditure and accrual cost of some programs, such as those run by the
VA. We conducted 40 focus groups with over 400 servicemembers across
all four services and enlisted and officer pay grades at eight military
installations in the continental United States. While the information
from the focus groups is not generalizable to the entire DOD population
of active duty servicemembers, it provides valuable context as to
servicemembers' perceptions about their compensation and augments DOD
survey findings. We reviewed DOD's Status of Forces survey data on
satisfaction with compensation. The 2002 survey administered to over
30,000 servicemembers had a response rate of 32 percent. DOD has
conducted and reported on research to assess the impact of nonresponse
rate on overall estimates. It found that, among other characteristics,
junior enlisted personnel (in pay grades E1 to E4), servicemembers who
do not have a college degree, and members in services other than the
Air Force were more likely to be nonrespondents. We have no reason to
believe that potential nonresponse bias not otherwise accounted for by
DOD's research is substantial for the variables we studied in this
report. Therefore, we concluded the data to be sufficiently reliable
for the purposes of this report. See appendix I for more detailed
information on our scope and methodology. We conducted our review from
August 2004 through May 2005 in accordance with generally accepted
government auditing standards.
Results in Brief:
The piecemeal approach to military compensation has resulted in a lack
of transparency that creates two interrelated problems for decision
makers. Specifically, this approach creates an inability to (1)
identify the government's total costs to provide compensation to active
duty servicemembers and (2) assess how compensation investments are
allocated to cash, benefits, and deferred compensation. No single
source exists to show the total cost of military compensation, and
tallying the full cost required us to synthesize information from
several different portions of the federal budget. In a typical civilian
firm, managers know the costs of compensation among other costs, such
as capital and technology, in order to make decisions on the most
efficient and effective use of resources. Furthermore, federal
accounting standards are aimed at providing relevant and reliable cost
information to assist Congress and executives in making decisions about
allocating federal resources. Therefore, we believe it is good business
practice for decision makers to establish a foundation that provides
them transparency over total compensation costs including the long-term
cost and implications of current decisions. Without transparency, DOD
and Congress do not have adequate visibility over a basic foundation of
what it is truly costing the government to compensate servicemembers.
Furthermore, they lack sufficient information to (1) identify long-term
trends in costs, (2) determine how to best allocate resources to ensure
the optimum return on compensation investments, and (3) assess the
efficiency of the current compensation system on DOD's ability to meet
recruiting and retention goals. This lack of transparency over the
total military compensation costs is another indication that DOD needs
a Chief Management Official (CMO)--a recommendation we recently
proposed to address a range of business transformation challenges in a
more strategic and integrated fashion.[Footnote 3]
The federal government's total costs to provide military compensation
are substantial and rising, and 51 percent of the total compensation
costs are allocated to noncash and deferred benefits. In fiscal year
2004, the federal government's total annual cost to provide military
compensation was about, on average, $112,000 per active duty
servicemember (including enlisted and officer personnel) when
compensation costs for cash, noncash, and deferred benefits are
considered.[Footnote 4] Adjusted for inflation, total cost of
compensation increased from about $123 billion in fiscal year 2000 to
$158 billion in fiscal year 2004--about 29 percent. The main drivers in
the growth of total compensation costs from fiscal years 2000 through
2004 included: (1) basic pay (from $38.4 to $47.4 billion, about 23
percent); (2) allowances for private housing (from $7.3 to $12 billion,
more than 66 percent); and (3) health care benefits for current
servicemembers, retirees, and dependents (from $13.8 to $23.3 billion,
about 69 percent). Continued significant future increases in these
costs, particularly health care, raise questions about the long-term
affordability and sustainability of the system. For example, the
Congressional Budget Office estimated that DOD could spend as much as
$52 billion annually on health care by 2020.[Footnote 5] Furthermore,
the mix of compensation for servicemembers is weighted toward noncash
and deferred compensation, with these types of compensation accounting
for slightly over half of annual compensation costs in fiscal year
2004. This mix in compensation stands in contrast to private sector and
federal civilian workforces, which typically receive one-third or less
of their compensation in the form of benefits and deferred
compensation. Furthermore, deferred compensation, like retirement pay,
represents about a third of total military compensation costs, but less
than one in five servicemembers will serve a full career and become
eligible for active duty retirement pay and benefits. Given the rapid
rise of compensation costs and the significant emphasis on noncash and
deferred compensation, it is unlikely that DOD's current approach to
compensation is reasonable, appropriate, affordable, and sustainable
over the long term.
According to recent DOD survey results, which were supported by our
focus group analysis, some servicemembers are dissatisfied, and in some
cases, harbor misperceptions about their pay and benefits in part
because DOD does not effectively inform them about the competitiveness
of their total compensation packages. It is industry best practice for
employers to educate employees about the value of their compensation in
terms of the pay and benefits they receive. We believe it is also
important to inform employees on how their total compensation compares
with the employment market. DOD's efforts to communicate pay and
benefit information to servicemembers--mainly through Internet Web
sites and distribution of annual earnings statements--have not
positively influenced servicemembers' perceptions. Repeated DOD-wide
surveys have consistently found that a high proportion--almost half of
servicemembers in some cases--are dissatisfied with aspects of their
compensation from basic pay to allowances for subsistence and housing.
Furthermore, DOD officials acknowledge that servicemembers harbor
misperceptions about their compensation. Our focus group findings,
though not generalizable, corroborated these perceptions and revealed
that servicemembers often misunderstood their compensation and harbored
concerns about it. When we compiled the data from the survey
administered during our focus group sessions, we found that about 9 in
10 participants underestimated the cost of their compensation packages,
and 80 percent believed they would make more in a civilian job.
However, a recent DOD-sponsored study showed that, on average, military
cash compensation alone--not including benefits--was at the 70th
percentile of like-educated civilians.[Footnote 6] Servicemembers
participating in our focus groups also expressed confusion over certain
aspects of their compensation, such as how their retirement system
worked. We heard frequent complaints from senior enlisted
servicemembers and officers that benefits were eroding, despite recent
efforts to enhance benefits. This perception, as mentioned before, is
in direct contrast to the reality that costs to compensate
servicemembers have risen dramatically in recent years and benefits
costs are projected to rise even more dramatically in the future. By
not systematically informing servicemembers about the value of their
total compensation, DOD is essentially allowing a culture of
dissatisfaction and misunderstanding to perpetuate even though the
department and Congress have made significant efforts in recent years
to increase military compensation.
We are making recommendations that should improve the transparency,
reasonableness, and appropriateness of the military compensation
system. In commenting on a draft of this report, DOD generally
concurred with our recommendations.
Background:
DOD is one of the nation's largest employers--employing approximately
1.4 million active duty military personnel and 1.2 million reservists.
In addition, 2 million retirees receive pay and benefits from the
department. DOD is also the largest employer and trainer of young
adults in the United States, recruiting about 200,000 individuals into
active duty in 2004--the majority of them recent high school graduates.
Although DOD competes with academia and other employers for these
qualified people, the military's distinctive culture and job experience
are unique from any other government or private sector employer. To
maintain national security, DOD must meet its human capital needs by
recruiting, retaining, and motivating sufficient numbers of qualified
people.
The Office of the Secretary of Defense, Personnel and Readiness is
principally responsible for establishing active duty compensation
policy. However, reservists fall under the active duty compensation
policy if they have been mobilized for active duty. The department also
sponsors regular studies on military compensation called the
Quadrennial Review of Military Compensation--most recently completed in
2002--that typically focus on specific issues like flexibility in
compensation. In 2005, the Secretary of Defense formed a committee to
study military pay in order to seek ways to maintain a cost-effective,
ready force. Although the structure of the military compensation system
has been largely unchanged since the end of World War II, with the
advent of the all-volunteer force in 1973, the system has been enhanced
by adding various pays, benefits, and tax preferences over time.
Currently, the system is a complex mix of pays, benefits, and tax
preferences--about a third of which are deferred until after the
completion of active duty service.
In the 1970s, DOD and Congress adopted the concept of "regular military
compensation"--which is defined as the sum of basic pay, allowances for
housing and subsistence, and the federal tax advantage[Footnote 7]--to
describe the foundation of servicemembers' cash compensation which can
be used to compare military and civilian pay.[Footnote 8] Basic pay--
which is predicated on rank and tenure of service--is the largest
component of regular military compensation. In addition to regular
military compensation, there are over 60 authorized special and
incentive pays--generally offered as incentives to undertake or
continue service in a particular specialty or type of duty assignment-
-as well as the combat zone tax exclusion, which generally makes income
earned while serving in a combat zone nontaxable.[Footnote 9]
Furthermore, DOD offers a wide range of benefits, many of which are
directed at members with family obligations. DOD believes benefits are
central to morale and readiness as well as important in providing
members with a quality of life to help cope with the sacrifices they
make.
DOD's Compensation System Lacks Transparency to Identify Total Costs
and How Compensation Is Allocated:
Decision makers in Congress and at DOD do not have adequate
transparency over total costs for providing military compensation to
active duty servicemembers in terms of how compensation is allocated in
the near term, if compensation investments are cost effective in
meeting recruiting and retention goals, how much changes to
compensation will cost in the long term, and whether compensation costs
are affordable and sustainable in the future. Lack of transparency over
costs is in part due to the sheer number of pays and benefits that make
up the military compensation system and to the lack of a single source
to show total cost of compensation. Moreover, the lack of principles to
guide military compensation policy is a long-standing problem for DOD.
Cost of Compensation Is Scattered Across Many Budgets:
A total cost to compensate servicemembers does not exist in a single
source for decision makers to view, and transparency is further
hindered by the sheer number and types of pays, benefits, and tax
preferences in the military compensation system. Good business practice
requires adequate transparency over investments of resources,
especially in times of fiscal balance constraint. In a typical civilian
firm, managers would know the costs of compensation among other
investments, such as capital and technology, in order to make decisions
on the most efficient use of resources because decision makers have to
consider both the obvious and implicit costs of their actions.
Furthermore, federal accounting standards are aimed at providing
relevant and reliable cost information to assist Congress and
executives in making decisions about allocating federal
resources.[Footnote 10] Therefore, we believe it is good business
practice for decision makers to establish transparency over total
compensation costs, including the long-term cost implications of
current decisions.
Because of the lack of a single source of compensation costs and the
number and types of pays and benefits that combine to make up the
compensation system, we had to gather information from multiple sources
to compile our estimate of the total costs to provide military
compensation. Funding for the numerous components of compensation
resides in different budgets (see table 1). For example, the funding
for cash compensation that servicemembers receive today, such as basic
pay and housing allowance, are in DOD's military personnel budget.
Despite its name, this title does not include all of the funding
provided for military compensation and benefits. Funding for noncash
benefits, such as health care and education assistance, is displayed
partially in the department's Operation and Maintenance budget as well
as in the VA's budget. And, deferred benefits like retirees' health
care, which represent a significant portion of the costs of
compensation, have long-term cost associations and are not adequately
visible. Funding for military retirement is budgeted for on an accrual
basis in the military personnel budget, as is health care for retirees
over 65 years of age and their dependents.[Footnote 11] However, health
care funding for retirees less than 65 years of age and their
dependents is appropriated annually in the Operation and Maintenance
budget as part of the Defense Health Program. In addition to DOD's
deferred benefits, some servicemembers are eligible for veteran's
benefits after they leave the military. These benefits, such as health
care, pensions, and other compensations, are funded annually through
the VA's budget. Furthermore, the lost federal tax revenue--the federal
tax benefit servicemembers' receive because part of their cash
compensation is nontaxable--is not displayed in a DOD budget exhibit
for decision makers to consider when assessing new proposals or changes
to the compensation system. This amount is significant: we estimate
that it totaled about $6.4 billion in fiscal year 2004. Furthermore, we
should note that our calculations underestimate the impact of
compensation costs to the federal government annually, because we did
not include significant outlays for the unfunded liabilities for
current retirees' pay and health care benefits that are in the
Department of the Treasury's annual budget, which totaled $34.4 billion
in fiscal year 2004. These unfunded liabilities are being paid out of
current appropriations, because the government has not always set aside
monies for future liabilities. In fact, the government did not start
setting aside monies for retirement pay until fiscal year 1985 or for
health care benefits for retirees until 2003.
Table 1: Total Costs to Provide Active Duty Servicemembers Compensation
(Source and Types):
Federal department's budget and type of budget: DOD Military Personnel;
* Contains all cash compensation received by servicemembers in their
"pay check" while serving on active duty and some costs for benefits;
Component of compensation: Cash components:
* basic pay;
* allowances for housing and subsistence;
* special and incentive pays;
* other allowances; Benefits:
* retirement pay accrual;
* health care accrual for retirees over 65 years of age;
* survivor benefits;
* death gratuities;
* other[A].
Federal department's budget and type of budget: DOD Operations and
Maintenance;
* Contains a number of benefits available to active duty servicemembers
and their dependents in various subcomponents, such as the Defense
Health Program, Defense Commissary Agency, Department of Defense
Education Activity, and the Morale, Welfare, and Recreation exhibit (OP-
34);
Component of compensation:
* DOD dependent schools (on-base schools);
* morale, welfare, and recreation programs (i.e., child care and
exchanges);
* commissaries;
* health care for active duty servicemembers and their dependents;
* education benefits.
Federal department's budget and type of budget: DOD Future Years
Defense Program (FYDP);
* A planning document published by DOD;
* Contains costs for upkeep and utilities costs for on-base family
housing;
Component of compensation:
* family housing upkeep and utilities;
* we were unable to identify similar costs for barracks (on- base
housing for single servicemembers).
Federal department's budget and type of budget: Department of Veterans'
Affairs Budget;
* Although the VA's primary customers are retired or honorably
discharged servicemembers, current active duty members are eligible for
these education and home loan benefits.[B];
Component of compensation:
* Montgomery GI Bill (education benefit);
* Guaranteed Home Loan program.
Federal department's budget and type of budget: Department of
Education;
* Funds provided to local school districts to offset the impact of lost
tax revenue because of military installations;
Component of compensation:
* funding for local school systems impacted by military dependents.
Federal department's budget and type of budget: Department of Labor;
* Program for servicemembers who are leaving the active duty force and
seeking civilian employment;
Component of compensation:
* employment assistance.
Federal department's budget and type of budget: Other costs;
* Certain costs are not available in any budget. We estimated those
costs using various methods:
* The Office of Management and Budget provided an unofficial estimate
of accrual costs for current active duty members' future veterans'
benefits;
* DOD's Office of the Actuary provided accrual cost estimates for
health care benefits for retirees and their dependents;
* We calculated lost federal tax revenue estimates based on information
from DOD and the federal tax code;
Component of compensation:
* compensation and benefits for retirees and honorably discharged
servicemembers;
* health care benefits for retirees under 65 and their dependents;
* federal tax expenditure resulting from special nontaxable allowances.
Source: GAO analysis.
Note: For more detailed information, see app. I.
[A] Other includes education benefits, savings deposit program,
adoption expenses, subsistence in kind, separation pay, partial
dislocation allowance, transportation subsidy, permanent change of
station, social security tax, unemployment benefits, and
servicemembers' group life insurance hazard payments.
[B] Upon joining active duty, servicemembers are enrolled in the
Montgomery G.I. Bill unless they opt out of the program. In fiscal year
2005, a participating servicemember paid $1,200 into the program and,
if enrolled as full-time students at an approved educational
institution, a servicemember received as much as $12,000 annually.
[End of table]
Since the costs of compensation are scattered across the federal
budget, no one organization has visibility over the total costs of
military compensation. The lack of transparency over total costs to
compensate servicemembers impacts decision makers' ability to manage
the system, including (1) assessing the long-term cost implications,
(2) determining how best to allocate resources to ensure an optimum
return on investment, and (3) assessing the efficiency of the current
compensation system on DOD's ability to meet recruiting and retention
goals. As a result, the current compensation system is made up of a
number of benefits and over 60 different pays and allowances that have
been added piecemeal over the years to address specific needs. The main
problem with this piecemeal approach is that it does not consider the
system as a whole--and, as a result, new initiatives are considered in
isolation and often with little consideration to how these will
contribute to the ability of the military compensation system to
efficiently meet recruiting and retention goals and if resources are
being allocated to ensure the optimum return on compensation
investments within current and expected resource levels. For example,
in 2000 Congress enhanced retirement benefits to include health care
for retirees over 65 years old and their dependents.[Footnote 12] This
additional benefit came at significant costs, about $6.5 billion
accrual funding in fiscal year 2004 alone, and with little evidence of
whether, and if so how it contributes to the efficiency and
effectiveness of the compensation system in terms of recruiting and
retention.
Lack of Principles to Guide Military Compensation Policy Is a Long-
standing Problem:
Challenges associated with piecemeal changes and adjustments to the
military compensation system have been a long-standing problem with the
system. In 1979, we evaluated DOD's compensation system and concluded
that piecemeal adjustments and a lack of overall guiding principles of
compensation were a problem in establishing a basis for evaluating
changes to the total compensation system.[Footnote 13] As a result, we
recommended that Congress establish a permanent, independent military
compensation board to identify and recommend pay principles, see that
pay principles are appropriately implemented, and continuously monitor
and make recommendations for changing the military compensation system
consistent with the established principles. At the time, DOD officials
believed that military pay increases should be linked to federal
civilian pay increases--and that special and incentive pays could be
used to alleviate critical skill shortages. Officials disagreed that a
board should be established, indicating that it would be
counterproductive to create a "headless fourth branch" of government.
However, the underlying problems we pointed out in 1979--lack of
explicit compensation principles and the difficulty in making major
changes to compensation--still exist today. The Military Compensation
Background Papers describe six principles that the compensation system
is designed to achieve; those principles are: managing manpower,
compatibility with the level of technology servicemembers employ,
equity, effectiveness in war and peace, flexibility, and
motivation.[Footnote 14] However, some 25 years later, these principles
do not provide clear policy and doctrine to guide military compensation
policy as described in this excerpt from DOD's Military Compensation
Background Papers:
"the relationships between the individual components of compensation
and their systemic interrelationships as a coherent structure remain
largely implicit rather than explicit. Virtually every aspect of
military activity has explicit doctrines, principles, and practices
embodied in field manuals, technical manuals, and various joint
publications. Military compensation is noteworthy in its lack of such
an explicit intellectual foundation."
Furthermore, the Secretary of Defense tacitly admitted the difficulty
in changing military compensation from inside the department when he
formed an independent advisory committee to study compensation in 2005.
Of particular concern to the department was the growth in entitlement
spending for things like health care and the appropriateness of the mix
of in-service and post-service compensation. However, Congress has
taken certain measures to enhance post-service compensation or benefits
that DOD has not requested or in some cases has discouraged, such as
the expansion of concurrent receipts for retirees with disabilities. At
the time of this report, the Secretary of Defense's committee was just
beginning its work; however, the Secretary had requested the committee
provide an interim report by September 2005 and conclude its work by
spring 2006.
In order to achieve lasting and comprehensive change, organizations
need sustained top leadership to help make significant and systematic
changes become a reality and sustain them over time. We have recently
recognized and suggested that to achieve such leadership a Chief
Management Official with responsibility for DOD's overall business
transformation efforts should be created.[Footnote 15] We believe the
long-standing lack of explicit principles and the difficulty in
changing military compensation from inside DOD is another example of
how a Chief Management Official could be beneficial to DOD.
Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human
Capital Goals or Not Sustainable in the Long Term:
The federal government's total costs to compensate its active duty
servicemembers have increased significantly in the past 5 years, and
given that costs are heavily weighted toward noncash and deferred
benefits, the structure of the current compensation system raises
questions about the reasonableness, appropriateness, and long-term
affordability and sustainability of DOD's approach to compensating its
military workforce. Between fiscal years 2000 and 2004, overall
compensation costs increased from $123 billion to $158 billion--or
about 29 percent, in 2004 dollars. Increases in costs were primarily
driven by basic pay, allowances for housing, and health care benefits.
Furthermore, over half of the mix of compensation costs is in the form
of noncash and deferred benefits, which stands in contrast to private
sector and federal civilian organizations that tend to rely more
heavily on cash pay, and less on benefits. Military analysts have noted
that benefits, especially deferred benefits like retirement, are a
relatively inefficient way to influence recruiting and retention,
compared to cash pay.
Compensation Costs Have Significantly Increased:
The total cost to the government to provide compensation for active
duty members has grown about 29 percent, adjusted for inflation,
between fiscal years 2000 and 2004, as shown in figure 1. Over this
same time period, the number of active duty troops remained relatively
constant at about 1.4 million people, but military compensation costs
grew from $123 billion to $158 billion in fiscal year 2004 dollars
annually.[Footnote 16] We estimate that the average cost of
compensation per servicemember (i.e., both enlisted personnel and
officers) in 2004 was about $112,000. Three things are important to
understand about our estimate. First, it is an average of what it cost
the government to compensate servicemembers, not what the
servicemembers "receive in their paycheck." Individual cash
compensation will vary significantly based on rank and other factors.
Furthermore, the value of benefits also varies significantly depending
on individual circumstances. Second, because agencies other than DOD
provide compensation to servicemembers, our estimate includes costs
appropriated to The Department of Veterans Affairs, the Department of
Education, and the Department of Labor as well as the lost tax revenue
as a result of special tax advantages received by military personnel
among others.[Footnote 17] Third, it does not represent the marginal
cost of adding servicemembers, because it does not include significant
costs for acquiring and training military personnel. Such costs are
substantial: DOD officials told us that the cost for training can be as
much as $36,000 per person if a broad range of training costs are
included.
Recently, other defense analysts have made attempts to estimate the
cost of compensation. While these estimates vary based on what costs
are included in their analyses, the trends are the same. For example,
the Congressional Budget Office (CBO) estimated that in 2002
compensation cost about $99,000 per active duty servicemember. DOD's
Office of Program Analysis and Evaluations calculated all military
compensation costs to be approximately $117,000 per servicemember in
fiscal year 2004. Other DOD officials have done similar work which
included compensation costs; for example, officials in the Office of
Secretary of Defense told us they recently estimated DOD's cost to add
an additional servicemember at about $109,000 per servicemember. Navy
officials have done detailed work to estimate the cost of manpower to
the Navy, and concluded that for example, the standard programming rate
for officers in pay grade O4 was about $126,000 and about $79,000 for
enlisted personnel in pay grade E-7; however, these costs do not
include health care accrual costs for retirees.
Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal Years
2000-2004:
[See PDF for image]
Note: Our per capita costs are based on active duty end strength.
According to DOD officials, since fiscal year 2002 over 100,000
mobilized reservists were paid out of the active duty compensation
budget. If you considered these personnel, the average costs to provide
compensation would be about $5,000 lower.
[End of figure]
Military Compensation Components Driving Total Cost:
Growth in military compensation is attributed, primarily, to increases
in (1) basic pay, (2) allowances for housing, and (3) health care cost.
* Basic pay, found in the military personnel budget, increased from
$38.4 billion to $47.4 billion from fiscal years 2000 to 2004--an
increase of about 23 percent--and is the largest component of the
compensation system.[Footnote 18] DOD has asked for and Congress has
supported sizable across-the-board raises in basic pay in order to
address concerns that military members may be underpaid compared to
comparable educated civilian counterparts. From fiscal years 2000 to
2004 the average pay increases to servicemembers exceeded average wage
increases for all private sector employees.
* Allowances for housing, found in the military personnel budget,
increased by about 66 percent from $7.3 billion to $12 billion between
fiscal years 2000 to 2004. Prior to fiscal year 2001, DOD's policy was
for members to pay for 15 percent of their housing costs out of pocket;
however, in fiscal year 2000, DOD introduced the "zero out of pocket"
initiative that increased servicemembers' housing allowances to
eliminate their out-of-pocket expenses by fiscal year 2005.[Footnote
19] This effort was to encourage servicemembers to live off-base and is
consistent with DOD's policy that states it is the department's
preference for servicemembers to live in civilian housing.
* Health care costs, including the costs for active duty servicemembers
and their dependents as well as accrual costs for retirees and their
dependents, increased from about $13.8 billion to $23.3 billion between
fiscal years 2000 and 2004, an increase of about 69 percent. This
increase is attributable, in part, to the fiscal year 2002 expansion of
health care benefits to retirees over 65 years of age to cover them and
their dependents for life.[Footnote 20] DOD raised concerns about
expanding entitlements, such as health care, that do not provide them
leverage over readiness. Also contributing is the higher-than-average
increase in costs of medical care. A 2003 study by CBO projected that
if DOD's medical spending increases at the same rate as per capita
medical spending in the United States, as a whole, it could increase to
possibly as much as $52 billion, or $38,000 per servicemember in 2002
dollars, by 2020.[Footnote 21] These costs include (1) current
appropriations from the operations and maintenance, defense health
program budget, for current servicemembers and their dependents; and
(2) estimated accrual costs for retirees and their dependents from the
DOD actuary.[Footnote 22] Given CBO's projections of substantial growth
in future costs and the 69 percent increase over the past 4 years,
serious questions about the affordability and sustainability of the
current compensation system arise.
Officials within the department told us that they sought increases in
basic pay and housing allowances because they think investments in
these types of compensation are more efficient in meeting the
department's recruiting and retention goals. Furthermore, continued,
significant increases in these areas--especially health care costs,
which could exceed $50 billion annually by 2020--raise questions about
the long-term affordability and sustainability of the current
compensation approach. The summary of military compensation components
displayed in table 2 shows the percentage changes in costs between
fiscal years 2000 and 2004.
Table 2: Summary of Changes in Compensation Costs, Fiscal Years 2000
and 2004:
2004 constant dollars in billions:
Components of compensation: Cash: Basic pay;
Fiscal year 2000: $38.4;
Fiscal year 2004: $47.4;
Percentage change: 23%.
Components of compensation: Cash: Housing allowance;
Fiscal year 2000: $7.3;
Fiscal year 2004: $12.0;
Percentage change: 66%.
Components of compensation: Cash: Subsistence allowance;
Fiscal year 2000: $3.1;
Fiscal year 2004: $3.4;
Percentage change: 8%.
Components of compensation: Cash: Special and incentive pays;
Fiscal year 2000: $3.3;
Fiscal year 2004: $4.3;
Percentage change: 30%.
Components of compensation: Cash: Allowances;
Fiscal year 2000: $1.9;
Fiscal year 2004: $3.5;
Percentage change: 84%.
Components of compensation: Cash: Tax advantage;
Fiscal year 2000: $5.3;
Fiscal year 2004: $6.4;
Percentage change: 22%.
Components of compensation: Cash: Total cash;
Fiscal year 2000: $59.3;
Fiscal year 2004: $77.0;
Percentage change: 30%.
Components of compensation: Noncash benefits: Subsistence in kind;
Fiscal year 2000: $1.2;
Fiscal year 2004: $3.5;
Percentage change: 185%.
Components of compensation: Noncash benefits: Other[A];
Fiscal year 2000: $10.3;
Fiscal year 2004: $10.0;
Percentage change: (3%).
Components of compensation: Noncash benefits: Education[B];
Fiscal year 2000: $0.4;
Fiscal year 2004: $0.7;
Percentage change: 68%.
Components of compensation: Noncash benefits: Installation based
benefits[C];
Fiscal year 2000: $4.4;
Fiscal year 2004: $5.2;
Percentage change: 20%.
Components of compensation: Noncash benefits: Health care;
Fiscal year 2000: $8.7;
Fiscal year 2004: $9.7;
Percentage change: 11%.
Components of compensation: Noncash benefits: Family housing and
barracks;
Fiscal year 2000: $3.2;
Fiscal year 2004: $3.1;
Percentage change: (1%).
Components of compensation: Noncash benefits: Total noncash;
Fiscal year 2000: $28.2;
Fiscal year 2004: $32.2;
Percentage change: 14%.
Components of compensation: Deferred benefits: Retired pay accrual;
Fiscal year 2000: $12.2;
Fiscal year 2004: $12.8;
Percentage change: 5%.
Components of compensation: Deferred benefits: VA compensation and
pension;
Fiscal year 2000: $9.0;
Fiscal year 2004: $11.1;
Percentage change: 23%.
Components of compensation: Deferred benefits: VA health care;
Fiscal year 2000: $8.4;
Fiscal year 2004: $10.3;
Percentage change: 23%.
Components of compensation: Deferred benefits: VA other;
Fiscal year 2000: $0.9;
Fiscal year 2004: $1.1;
Percentage change: 23%.
Components of compensation: Deferred benefits: Health care accrual;
Fiscal year 2000: $5.1;
Fiscal year 2004: $13.6;
Percentage change: 166%.
Components of compensation: Deferred benefits: Total deferred;
Fiscal year 2000: $35.6;
Fiscal year 2004: $48.9;
Percentage change: 38%.
Total compensation;
Fiscal year 2000: $123.1;
Fiscal year 2004: $158.1;
Percentage change: 29%.
Source: GAO analysis.
Notes: According to DOD officials, there were over 100,000 mobilized
reservists paid out of the cash compensation in fiscal year 2004. For
more detail on sources, see app. I.
[A] Includes separation pay, partial dislocation allowance,
transportation subsidy, permanent change of station, adoption expenses,
savings deposit program, other personnel support, special support,
social security tax, unemployment benefits, special compensation, VA
home loan, death gratuities, survivor benefits, and other costs.
[B] Includes education, off-duty voluntary education, and servicemember
GI bill and certification.
[C] Includes exchanges, commissaries, childcare, DOD dependent schools,
and other morale, welfare, and recreation costs.
[End of table]
In addition, special and incentive pays grew about 30 percent--from
$3.3 billion to $4.3 billion--from fiscal years 2000 through 2004. This
increase is substantial on a percentage basis, but special and
incentive pays are not driving the overall budget trends because the
amount is a relatively small portion of the overall compensation cost.
By our calculations, these special pays only represent about 6 percent
of cash compensation, and about 3 percent of total compensation, on
average. DOD has more than 60 different special pays that fall into
this category including reenlistment bonuses and hazardous duty pay, as
well as other pays for specific duties like aviation, medical, and
incentives for servicemembers to take certain assignments among others.
Because most compensation is determined by factors such as tenure,
rank, location, and dependent status, these special pays and allowances
are the primary monetary incentives DOD has for servicemembers other
than promotions.
Heavy Emphasis on Benefits Reflects DOD Commitment to Servicemembers
and Their Families, but Is Unlike Civilian Counterparts and Inefficient
for Recruiting and Retention:
Noncash and deferred benefits made up just over half of the total costs
of providing military compensation since 2000. DOD has historically
viewed noncash benefits as critical to morale, retention, and the
quality of life for servicemembers and their families. In April 2002,
DOD issued a strategic human capital plan addressing quality-of-life
issues and benefits. According to DOD officials, the plan, entitled A
New Social Compact: A Reciprocal Partnership Between the Department of
Defense, Service Members and Families, is needed to ameliorate the
demands of the military lifestyle, which includes frequent separations
and relocations, and to provide better support to servicemembers and
their families. It emphasizes the need to maintain programs and
services viewed as benefits by servicemembers. Furthermore, we recently
reported that DOD has instituted a number of benefits that reflect
demographic changes in the active duty force--primarily the increase in
servicemembers with family obligations.[Footnote 23] Compared to
civilians in government and in the private sector, the military's
compensation costs are much more heavily weighted toward benefits and
deferred compensation like retirement and health care for retirees.
Efficiency, as defined by DOD, is the amount of military compensation-
-no higher or lower than necessary--that is required to fulfill the
basic objective of attracting, retaining, and motivating the kinds and
numbers of active duty servicemembers needed.[Footnote 24] However, the
efficiency of some benefits is difficult to assess because the value
that servicemembers place on them is different and highly
individualized. It is generally accepted and a recent study indicates
that some deferred benefits, such as retirement, are not valued as
highly by servicemembers as current cash compensation.[Footnote 25]
Military Compensation System Is Weighted Toward Noncash and Deferred
Benefits:
In fiscal year 2004, noncash and deferred benefits made up about 51
percent of total compensation costs, on average. This means that it
costs the government more to provide benefits and deferred compensation
than current cash compensation. Of this, deferred benefits represented
a significant portion of noncash compensation, as figure 2 shows. Since
2000, deferred benefits have made up about one-third of total
compensation costs. These benefits are the promise of future
compensation--like retirement pay and health care as well as other
benefits--for active duty servicemembers who retire with at least 20
years of service or who leave the force and become eligible for
veterans benefits. Deferred benefits impact the current cost of
compensation because monies must be set aside today to provide these
benefits in the future, over the servicemember's lifetime.
Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation
Costs per Active Duty Servicemember in Fiscal Year 2004:
[See PDF for image]
Note: Over 100,000 mobilized reservists were paid out of total cash
compensation. Accounting for those reservists, the average cash
compensation was about $49,000 per servicemember. These costs reflect
the average costs to the government to provide these components of
compensation. For example, all servicemembers do not receive a cash
housing allowance, because some servicemembers live on base in family
housing or barracks. The cost presented represents the total amount
appropriated for housing allowances divided by the number of
servicemembers, thus, an average cost to the government.
[End of figure]
Civilian Compensation Emphasizes Salary and Wages:
While it is difficult to make direct comparisons between military and
civilian compensation because of the accessibility of some benefits
(e.g., health care, retirement to private sector employees), it seems
clear that, in general, DOD compensation is weighted much more heavily
toward benefits. Some private sector organizations and the federal
government provide benefits similar to those provided by the military,
such as retirement, health care, paid time off, and life insurance;
military benefits, in some instances, far exceed those offered by the
private sector, such as free health care and housing as well as
discount shopping.[Footnote 26]
In contrast to the mix of compensation for the military, figure 3 shows
that civilian counterparts in the private sector and the federal
government receive, in broad terms, most of their compensation in cash
salary/wages. Civilians in private industry, on average, received about
82 percent in salary and wages while federal government civilians
received about 67 percent in salary and wages. Thus, one third or less
of these workers' compensation is typically in the form of benefits or
deferred compensation.
Figure 3: 2003 Mix Salary/Wages and Benefits in Civilian Compensation:
[See PDF for image]
Note: Average compensation costs are in 2004 dollars.
[End of figure]
Current Mix Is Highly Inefficient for Recruiting and Retention:
The mix of compensation is highly inefficient for meeting near-term
recruiting and retention needs. Cash pay today is generally accepted as
a far more efficient tool than future cash or benefits for recruiting
and retention. Because the preference for cash is particularly strong
in young adults, this adage is especially true for the military because
the active duty workforce is mainly comprised of people in their
twenties. For example, a recent study offering servicemembers a choice
of lump-sum payments or annuities found that a vast majority of
servicemembers preferred a lump-sum cash payment versus deferred
compensation in the form of an annuity.[Footnote 27] According to the
study, more than 50 percent of officers and 90 percent of enlisted
servicemembers had discount rates of at least 18 percent; that is, they
value $1 received in 20 years to be worth only about 4 cents today. The
study also found that the preference for cash today was particularly
strong among younger servicemembers.
This "personal discount rate" has important implications for military
compensation policy, especially when it comes to considering deferred
benefits or compensation. Not only do people heavily discount the value
of future benefits, less than one in five in the military will receive
the most lucrative and costly benefits offered by the military,
specifically active duty retirement pay and health care benefits. This
is because only 17 percent of those who join the military will
ultimately serve a 20-year career and thus earn nondisability
retirement pay and health care for life. Figure 4 illustrates that
based on current actuarial assumptions, 47 percent of new officers and
15 percent of new enlistees attain 20 years of active duty
service.[Footnote 28] Thus, a significant portion of the compensation
budget--about 17 percent--is being allocated to provide for future
retirement pay and health care for current active duty members who will
become eligible to receive these benefits even though a relatively
small percent of the force will ultimately receive these benefits.
Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 20-
Year Career:
[See PDF for image]
[End of figure]
Taking together the personal discount rate and the relatively few
servicemembers who earn retirement benefits, defense compensation
analysts have suggested that this is an inefficient allocation of the
overall compensation investment. This insight is not new, and is likely
a key reason why private sector companies have such a high proportion
of cash in their compensation mix. Thus, DOD's current approach to
compensation raises serious questions about the reasonableness and
appropriateness of continuing to weight compensation toward noncash and
deferred benefits. However, DOD officials told us they feel that this
efficiency argument about entitlements is often outweighed by the
desire in DOD and in Congress to "take care" of servicemembers and
their families. This makes adjusting compensation extremely difficult
for decision makers, especially amid concerns of eroding benefits, as
discussed later in this report. When concerns have arisen, benefits
have often been added with little consideration of what they will cost,
how they compare with overall market data, whether costs are affordable
and sustainable over the long term, or their effectiveness and return
in terms of recruiting or retention. The cumulative effect of this
approach raises serious questions about the reasonableness,
appropriateness, affordability, and sustainability of the current
military compensation system in light of 21st century trends and
challenges.
DOD's Lack of an Effective Communication and Education Effort on
Compensation Has Allowed Servicemembers' Misperceptions and Concerns
about Their Compensation to Perpetuate:
According to DOD surveys and analysis of our focus group findings and
survey data, many servicemembers are dissatisfied, and in some cases,
harbor significant misperceptions about their pay and benefits in part
because DOD does not effectively educate them about the competitiveness
of their total compensation packages. This has led to an atmosphere of
perpetual dissatisfaction and misunderstanding about compensation among
servicemembers. Servicemembers tend to be more satisfied with their
total compensation packages than with specific aspects of their pay and
benefits. They continue to express dissatisfaction with specific
aspects of their compensation. In our focus groups, servicemembers had
misperceptions about compensation; specifically (1) they underestimated
the costs of their compensation and how it compares to civilian wages,
(2) were unaware of or confused about certain aspects of their
compensation, and (3) were concerned about erosion of benefits.
Servicemembers Have Found DOD's Efforts to Educate Them about Their
Compensation Unreliable and Difficult to Access:
It is industry best practice for employers to educate employees about
the value of their pay and benefit components of their compensation. We
also believe that by communicating the value of the compensation
investment and ensuring it is understood, DOD will ensure an increased
return on their investment because employees who know the value of
their total compensation packages are more likely to be engaged and
motivated in their work. In addition, past studies suggest that
revealing more information about components of compensation has a
greater impact on the component's satisfaction rate than the actual
amount itself.[Footnote 29] Servicemembers, especially enlisted
personnel, said they frequently relied on unofficial sources of
information, such as word of mouth or service newspapers. Many
servicemembers discussed how the official sources of information
available are often difficult to access or appear to them to be
dishonest or misleading.
DOD makes various efforts to educate servicemembers by providing annual
earnings statements (see app. II for a sample of Personal Statement of
Military Compensation) providing online information on compensation,
and providing servicemembers access to personnel specialists to answer
questions. However, servicemembers stated that the online services
frequently are down or that it is difficult to access services such as
the "myPay" Web site.[Footnote 30] DOD officials acknowledge that
access to the "myPay" Web site has been a long-standing, recognized
problem that is a result of efforts to ensure the security of the
personal pay information available on the site. Over half of our focus
groups commented on how unhelpful official sources are to them in
understanding aspects of compensation. Many stated that the annual
earnings statement, at times referred to despairingly in our focus
groups as the "lie sheet," was not believable because they do not
understand how the amounts identified as their total compensation
(noncash and deferred) were calculated.[Footnote 31] Enlisted members
and officers told us that they felt recruiters and personnel
specialists often gave misguided information or could not provide
answers to servicemembers' questions on compensation. Additionally,
members often discussed how the lack of comprehensive communication and
education on compensation is a problem because they often find
themselves unaware of certain additions or changes to their pay and
benefits. Servicemembers offered suggestions as to how to improve
education on compensation by consolidating information into a single
location to obtain information on all pay and benefit elements, while
assuring it is clearly accessible and easy to understand. DOD officials
acknowledge that generally servicemembers do not realize the full value
of their compensation and have misperceptions about their compensation.
The Defense Finance and Accounting Service is implementing tools to
address these problems. To date, they have developed a newsletter--that
provides information on changes to compensation or information about
compensation that is widely misunderstood or unknown, such as how to
get a "myPay" Web site access code, and bulletins that provide
information on specific topics of interest that are sent to Army
personnel and plan to expand these tools to the other services.
The efforts made to date by DOD to explain the value and
competitiveness of compensation stands in contrast to the substantial
investment the department makes to recruit new members. As of fiscal
year 2003, the department was spending over $13,000 per enlisted
recruit for advertising, bonuses, incentives, and recruiter pay and
support.[Footnote 32] We do not have comparable data on what the
department spends to educate servicemembers on compensation, but DOD
officials told us that it has not been a priority department wide and
DOD has never mounted a comprehensive campaign to explain the
competitiveness of its compensation to servicemembers.
Servicemembers Tend to Be More Satisfied with Their Total Compensation
Package than with Specific Aspects of Their Compensation:
During the 1990s, the military benefit package was significantly
enhanced in response to servicemembers' concerns of eroding benefits;
yet servicemembers have continued to express dissatisfaction with many
aspects of their compensation. In the 2002 Status of Forces Surveys of
Active Duty Servicemembers, participants were asked to rate their
satisfaction with specific components within their military
compensation. As figure 5 shows, a substantial percentage of
servicemembers were dissatisfied with numerous aspects of their
compensation, including basic and special pays and housing and
subsistence allowances.
During more than half of our focus groups, servicemembers cited base
pay, the subsistence and housing allowance, and special and incentive
pays as reasons for dissatisfaction along with health care and others.
In general, officers tended to be more satisfied with base pay than
were enlisted personnel. Six of the eight focus groups with senior
enlisted servicemembers expressed dissatisfaction with their pay
especially compared to junior officers, who the senior enlisted
servicemembers perceive as having less experience and relying on them
for on-the-job training. While members recognized that there have been
improvements in the housing allowance with DOD's recent effort to
increase the allowance,[Footnote 33] they complained that these
increases have had little effect because they perceive that landlords
increase rent by the same amount. Additionally, 8 of our 40 focus
groups discussed how it is unfair that servicemembers with dependents
receive more housing allowance than single members. Moreover, members
had varying perceptions about special pays and incentives. Some were
dissatisfied with the amount of special pays and thought they should be
increased. Others were dissatisfied because it was unclear to them why
everyone does not receive special pays. This is particularly true for
senior enlisted pay grades that are ineligible for reenlistment
bonuses. Furthermore, health care was most frequently discussed as a
source of dissatisfaction as well as satisfaction. While servicemembers
were satisfied with the minimal to no cost of health care for
themselves and their family, 31 of our 40 focus groups commented on
their dissatisfaction with the quality and access to health care.
Additional reasons of why servicemembers most frequently reported these
components and others as sources of dissatisfaction are listed in
figure 5.
Figure 5: Reasons for Servicemembers' Dissatisfaction with Pay and
Benefits:
[See PDF for image]
Note: For the Active Duty Status of Forces survey, DMDC utilized
stratified random sampling, where all members of a population are
categorized into homogeneous groups, procedures to ensure adequate
sample sizes for their reporting categories, thereby creating
generalizable findings with a sampling error of +/-2 percent. Our focus
group survey results are not generalizable because we did not use
random sampling to collect the data. For more information on our focus
group methodology see app. I.
[A] We asked servicemembers separate questions about their satisfaction
with medical and dental care. The numbers reflected above are
servicemembers' dissatisfaction with medical care. Nineteen percent of
enlisted personnel and 12 percent of officers reported they were
dissatisfied with their dental care, while 40 percent of enlisted
personnel and 32 percent of officers reported they were dissatisfied
with their families' dental care.
[End of figure]
Although servicemembers expressed dissatisfaction with certain pays and
benefits, many were more satisfied when considering compensation as a
whole in the Status of Forces survey. DOD surveys in 2003 and 2004
showed that about 47 percent of servicemembers were satisfied with
their overall cash compensation (i.e., base pay, allowances, and
bonuses), which is significantly more than their satisfaction with
specific aspects of their compensation. This was evident during our
focus groups as well: servicemembers were often more satisfied with
their compensation overall than they were with specific aspects of
their compensation, like the housing allowance.
Despite their dissatisfaction with many aspects of their compensation,
servicemembers expressed a clear preference for cash when asked if they
would make any changes to the compensation system. In 35 of our 40
focus group sessions, servicemembers were willing to decrease their
noncash benefits if those benefits were replaced with cash. For
example, servicemembers in our focus groups said that they prefer
frequenting off-base discount stores more than the commissaries and
exchanges. Also, servicemembers in our focus groups said they would
prefer the cash equivalent to their medical coverage in order to obtain
their own health care because of their dissatisfaction with the present
choice. Servicemembers, especially junior officers who said they do not
intend to stay in the military for a full 20-year career, told us that
they would prefer DOD to give them cash that they could invest toward
their retirement.[Footnote 34] Comments like these, which we heard
frequently, seem to support past studies indicating servicemembers have
a strong preference for cash compensation today.[Footnote 35] However,
such personal preferences were offset by other concerns. Specifically,
during 16 of our 40 focus group sessions, servicemembers expressed
concern that if they were to receive an increase in cash it would not
equal the value of their current noncash or deferred benefit. Or,
changing to more cash compensation might not be in the best interest of
all members, especially the junior enlisted personnel, who might not
manage their finances well.
Servicemembers in Our Focus Groups Expressed Certain Misperceptions and
Concerns about Their Compensation:
During our focus group discussions, servicemembers (1) underestimated
the cost of their compensation and how their compensation compares to
civilian wages, (2) were unaware of or confused about certain aspects
of their compensation, and (3) were concerned about erosion of
benefits. These findings suggest that a culture of dissatisfaction and
misunderstanding about compensation exists among servicemembers.
Underestimation of Total Compensation:
Servicemembers consistently underestimated how their pay compares to
the private sector. Almost 80 percent of servicemembers participating
in our focus groups reported in our survey of focus group participants
that they believe they are paid less than their civilian
counterparts.[Footnote 36] In addition, during the focus groups
servicemembers frequently discussed how they were dissatisfied with
their military pay because they believe that they could make more "on
the outside" as a civilian.[Footnote 37] Moreover, when asked how much
DOD spends on cash pays, retirement, and health care for them, 9 out of
10 servicemembers participating in our focus groups underestimated how
much it cost to provide their compensation.
While some specific skill groups could likely make considerably more in
civilian jobs, such perceptions of noncompetitive compensation seem to
be inaccurate in broad terms. The most recent Quadrennial Review of
Military Compensation--a DOD commission that reviews military
compensation--found that cash compensation fares favorably overall to
civilian wages. Specifically, they compared cash compensation
(including tax advantage, but not including special pays or benefits)
with comparably educated civilians. They found that, on average,
military pay was at the 70th percentile or higher of civilian
wages.[Footnote 38] It should also be noted that this review of
military compensation found that, based on historical data, when DOD
pays servicemembers at around the 70th percentile of civilian wages it
is competitive in the employment market--that is, DOD has generally not
experienced recruiting or retention problems when compensating
servicemembers at this level. In sum, this means that DOD seeks to pay
servicemembers competitive cash wages when compared to civilians and,
at the same time, provides increasingly expensive benefits that are in
most cases much greater than those provided by the private sector.
Lack of Awareness or Understanding of Aspects of Compensation:
Although most servicemembers were aware that their compensation was a
complex mix of cash and benefits, some servicemembers were unaware of
certain aspects of their compensation; for example, servicemembers were
not aware of which retirement system they fell under or specifics about
their retirement benefits. Some servicemembers expressed confusion on
the repeal of the REDUX retirement system or did not realize that
retired members and their dependents now receive health insurance for
life under the military's healthcare system, TRICARE. Also,
servicemembers did not understand and had misperceptions about many
components of their cash compensation. For instance, some enlisted
members were unsure as to how special pays were allocated, while others
were not as familiar with the federal tax advantage they receive.
Additionally, servicemembers showed frequent misperceptions about the
subsistence allowance being designed for the member and not the family.
Moreover, servicemembers often complained of how they did not know how
to access information about health care benefits for their family.
In contrast to pay and benefits, focus group participants seldom raised
deferred compensation as a reason for dissatisfaction or satisfaction,
and few junior enlisted personnel included deferred benefits when
describing their compensation. Some servicemembers expressed concern
about losing deferred benefits that were implicitly promised to them as
part of joining the military. In addition, a majority of the focus
groups did not recognize veterans' benefits as a component of their
military compensation. Of the servicemembers who discussed veterans'
benefits, they focused on the home loan program.[Footnote 39]
Concern about Eroding Benefits:
During the 1990s, some servicemembers expressed concerns that their
benefits were eroding, particularly their health care and retirement
benefits. In response to such concerns, the military benefit package
has been significantly enhanced. In recent years, for example, Congress
restored retirement benefits that had previously been reduced for some
servicemembers, significantly expanded their retirement health
benefits, and allowed concurrent receipt of disability and retirement
pay. However, leaders in both the enlisted and officer ranks in our
focus groups were concerned that their benefits have still been eroding
despite these recent efforts. They often talked about retirement
benefits worsening as well as about decreases in base services provided
through the Morale, Welfare, and Recreation organization--such as
outdoor recreational equipment discounted rentals.
Conclusions:
DOD is maintaining an increasingly expensive and complex military
compensation system comprising a myriad of pays and benefits. With the
costs scattered across the federal budget, decision makers within the
administration and Congress have insufficient transparency over the
total costs to compensate servicemembers, particularly with respect to
deferred costs, such as TRICARE--which is projected to experience
explosive growth in the future. Moreover, changes to the compensation
system are made in a piecemeal fashion with an imprecise understanding
of how the changes will affect the total cost of compensation or what
return on investment decision makers should expect in terms of
recruiting and retention. This lack of transparency is becoming a more
urgent matter today as DOD and all federal agencies face tough choices
ahead managing the serious and growing long-term fiscal challenges
facing the nation. For DOD, these trade-offs could become as
fundamental as investing in people versus investing in hardware--tough
choices for a military with aging infrastructure and equipment that
could have readiness implications in the future. Compiling
comprehensive information about the total cost of compensation--as well
as how it is allocated to cash and benefits--would be a crucial first
step for the department and Congress to lay a foundation for future
decisions. Without such information, decision makers at DOD and
Congress do not know what it is costing the government to compensate
servicemembers. Furthermore, DOD has not performed the analysis
necessary to determine whether its current allocation to cash and
benefits is reasonable or appropriate. With dramatic increases in
compensation costs and an expanding budget--mostly resulting from
supplemental appropriations from Congress to fund activities and
operations related to the Global War on Terrorism--it is highly
questionable whether the rising costs and current allocations are
affordable and sustainable over the long term, especially when
supplemental funding recedes. Again, because DOD's compensation system
lacks transparency over these issues, the decision makers in the
administration and Congress cannot adequately assess whether DOD's
current approach to compensation is most efficiently meeting its needs
for both today and tomorrow.
DOD also faces a sobering marketing challenge--convincing skeptical
servicemembers that their compensation is competitive, overall. The
department's efforts thus far have been ineffective, and military
members are still dissatisfied with key aspects of their compensation,
and harbor several misperceptions and concerns that their compensation
is eroding, or will in the future. Pay comparison studies conducted by
DOD, however, show that military compensation is quite competitive even
without considering benefits. Recent efforts to improve benefits for
retirees have done little to address dissatisfaction among current
members. This dilemma exists for two reasons: (1) while servicemembers
do not want to lose benefits, they value future benefits much less than
current cash; and (2) fewer than one in five of those servicemembers
who begin military service will ultimately receive those benefits.
Without more emphasis on marketing the value of the cash pay as well as
the total compensation received overall, DOD will be unable to improve
servicemember perceptions, which could have implications for future
recruiting and retention efforts.
Recommendations for Executive Action:
To improve transparency over total compensation; to ensure the
compensation system is reasonable, appropriate, affordable, and
sustainable; and to better educate servicemembers about the
competitiveness of their compensation, we recommend that the Secretary
of Defense take the following three actions:
* Compile the total costs to provide military compensation and
communicate these costs to decision makers within the administration
and Congress--perhaps as an annual exhibit as part of the President's
budget submission to Congress. In preparing the annual exhibit, DOD may
want to work with the Office of Management and Budget.
* Assess the affordability and sustainability of the compensation
system and its implications on readiness as well as the reasonableness
and appropriateness of the allocation to cash and benefits and whether
changes in the allocation are needed to more efficiently achieve
recruiting and retention goals in the 21st century.
* Develop a comprehensive communication and education plan to inform
servicemembers of the value of their pay and benefits and the
competitiveness of their total compensation package when compared to
their civilian counterparts that could be used as a recruiting and
retention tool.
Matter for Congressional Consideration:
The Congress should consider the long-term affordability and
sustainability of any additional changes to pay and benefits for
military personnel and veterans, including the long-term implications
for the deficit and military readiness. Furthermore, Congress should
consider how best to proceed with any significant potential
restructuring of existing military compensation policies and practices,
including whether a formal commission may be necessary.
Agency Comments and Our Evaluation:
DOD's comments are included in this report as appendix III. DOD
generally concurred with our recommendations, but raised some technical
concerns about the way we compiled compensation costs data.
DOD partially concurred with our first recommendation to compile the
total costs to provide military compensation and communicate these
costs to decision makers. In DOD's response, it noted that it agrees
with the goal of making total compensation costs transparent to
decision makers; however, the department noted that this may be a more
appropriate issue for the Office of Management and Budget since the
costs extend to four departments. As we noted in our report, lack of
transparency over costs is in part due to the sheer number of pays and
benefits that make up the military compensation system and the lack of
a single source to show total cost of compensation. By establishing
transparency of total military compensation costs, DOD would have a
more complete picture of how its military members are being compensated
and be in the best position to compile these costs for decision makers.
DOD concurred with our second recommendation and stated that it is
already engaged in multiple simultaneous efforts to assess the
overarching military personnel compensation strategy. In addition, DOD
said that it will continue to actively point out the impact of the
legislative process to Congress as it did with concurrent receipt, the
survivor benefit program, and expanding retiree health care.
DOD partially concurred with our third recommendation to develop a
comprehensive communication and education plan to inform servicemembers
of the value of their pay and benefits and the competitiveness of their
total compensation package when compared to their civilian
counterparts. The department acknowledged that there is a perception
that military compensation is underreported and undervalued, but
pointed out that all of the services as well as the Office of the Under
Secretary of Defense for Personnel and Readiness currently have
multiple resources available for servicemembers, including Web sites,
such as the Navy's electronic pay and compensation calculator, and
brochures, such as the Air Force's compensation fact sheet. We believe,
as discussed in our report, that these official sources are not
effective, because of the continuing dissatisfaction with compensation.
DOD said that it will explore an information/marketing campaign that
will improve understanding of the system.
DOD also raised technical concerns; specifically, it believed that we
did not adequately describe the impact of the increase in funding
related to the Global War on Terrorism as well as how we converted the
costs to constant year dollars. In its comments, DOD stated that the
fiscal year 2004 compensation costs included over $17 billion in
supplemental funding for the war on terrorism, and much of this funding
was used to pay for mobilized reservists. While it is true that our
estimates include supplemental funding, we do not believe that the
inclusion of this funding changes our findings or conclusions.
Supplemental funding represents real costs to the federal government
that we believe are appropriate to include when calculating how much
the federal government spends on compensating military members.
However, we took DOD's concerns into account and added footnotes in our
report to explain our approach. DOD also raised concerns about our use
of end strength instead of average strength in our per capita
calculations. We believe that end strength, which represents only
active population, is an appropriate denominator to calculate per
capita active duty costs because it provides a consistent population to
spread costs of cash, noncash benefits, and deferred benefits. To use
average strength, which includes mobilized reservists, would not have
been an accurate representation of active duty per capita costs for
noncash and deferred benefits. However, in response to this comment, we
added footnotes that indicate that the cash compensation for fiscal
year 2004 includes costs for mobilized reservists and including those
reservists in our per capita calculations would have decreased cash
compensation by about $5,000 per servicemember. Finally, DOD raised
concerns about our adjustments for inflation in our data. We used the
National Defense Budget Estimates published by the Office of the Under
Secretary of Defense (Comptroller). According to the document, the
deflators we used provide inflation indexes in base years for each DOD
appropriation title to be used in converting total obligation authority
from current to constant dollars. To address DOD's concerns that the
total cost data are not accounting for the fact that the military pay
raises have been larger than other civilian pay raises, we added
footnotes that compared military pay increases, which averaged over 21
percent between fiscal years 2000 and 2004, to the all urban workers
Consumer Price Index and the Employment Cost Index for civilian wages
and salaries, which over the same period increased 9.7 percent and 13.3
percent, respectively.
We are sending copies of this report to the Secretary of Defense. In
addition, the report will be available at no charge on GAO's Web site
at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions regarding this report, please
contact me at (202)512-5559 [Hyperlink, Stewartd@gao.gov]. Other staff
members who made key contributions to this report are listed in
appendix IV.
Signed by:
Derek B. Stewart:
Director, Defense Capabilities and Management:
List of Congressional Committees:
The Honorable John Warner, Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan L. Hunter, Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Lindsey Graham, Chairman:
The Honorable Ben Nelson:
Ranking Minority Member:
Subcommittee on Personnel:
Committee on Armed Services:
United States Senate:
The Honorable John M. McHugh, Chairman:
The Honorable Vic Snyder:
Ranking Minority Member:
Subcommittee on Personnel:
Committee on Armed Services:
House of Representatives:
The Honorable Ted Stevens, Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable C. W. Bill Young, Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
Calculation of the Costs of Providing Active Duty Compensation:
To calculate the cost of compensating active duty servicemembers to the
federal government, we interviewed officials from the Department of
Defense (DOD) including the Office of the Secretary of Defense,
Undersecretary for Personnel and Readiness' office of compensation, the
office of the Comptroller within the Office of Secretary of Defense and
the services, the Office of the Actuary, and Health Affairs. In
addition, we interviewed officials from Department of Veterans' Affairs
(VA), Department of Labor, Department of Education, Office of
Management and Budget, and the Congressional Budget Office. See table 4
for an overview of our sources of information. In comparing the mix of
cash and noncash compensation of active duty servicemembers to that of
private industry employees and federal civilians, we used the
Department of Commerce's Bureau of Economic Analysis data to determine
the typical percentage of compensation that is allocated to
salary/wages and benefits in private industry and federal civilian
compensation systems.
We examined and compiled data for fiscal years 2000-2004 from the Army,
Air Force, Marine Corps, and Navy's military personnel and operations
and maintenance budget justification books. Within the operations and
maintenance justification books, we reviewed the budgets of the defense
health program; the defense commissary agency; the morale, welfare and
recreation activities (OP-34 exhibit); and DOD dependent education
activity. In addition, we reviewed and compiled data from the future
years defense planning document. We also reviewed and compiled data
from the VA benefits and health care budget justification books. We
used deflators to adjust the budget appropriations into current fiscal
year 2004 dollars.
To estimate the total federal tax expenditure that results from the tax-
exempt housing and subsistence allowances military personnel receive,
we grouped servicemembers by earnings, allowances, and tax status for
the years 2000 to 2004 and used the National Bureau of Economic
Research's TAXSIM Model to simulate tax liabilities under different
scenarios.[Footnote 40] Only military income was considered.
Nonmilitary income, such as spousal earnings or investment income,
would likely increase marginal tax rates and, thus, increase our tax
expenditure estimates.[Footnote 41] A servicemember's earnings and tax
status were determined by rank, years of service, and number of
dependents.[Footnote 42] Allowances are determined by rank and number
of dependents, and we assumed servicemembers living on-base received
the average housing allowance of similar servicemembers living off-
base. The number of servicemembers in each group for each year was
provided by the DOD's Selected Military Compensation Tables. The tax
expenditure for each group is estimated as the number of servicemembers
in the group multiplied by the difference in the tax liabilities of a
representative member of the group assuming that the allowances are and
are not taxable.
To estimate health care accrual costs, we used official estimates of
accrual health care costs for all retirees and their dependents
provided by DOD's Office of the Actuary. Since 2003, health care costs
for retirees over 65 years of age and their dependents are accrual-
budgeted in the DOD Military Personnel budget. However, health care
costs for retirees under 65 years of age and their dependents are
budgeted through an annual appropriation to the Defense Health Program
(DHP). Because the DHP annual budget includes health care costs for
active duty servicemembers and their dependents as well as retirees
under 65 and their families, we had to estimate the share of DHP costs
associated with active duty servicemembers and their dependents for the
fiscal years 2000-2004. Using similar methodology employed by the
Congressional Budget Office, we transformed DHP enrollee data (broken
out by gender, age category,[Footnote 43] and whether they were active
duty personnel, family of active duty personnel, retirees under 65, or
family of retirees under 65) into equivalent demand units, because
enrollees do not all have the same underlying demand for health care
services--average health care expenditures and reliance upon DHP differ
across the groups.[Footnote 44] The estimated share of DHP dollars due
to active duty service is the ratio of equivalent demand units for
active duty personnel and their families to the total number of
equivalent demand units in DHP. We first used the Medical Expenditures
Panel Survey (MEPS) to estimate the average total health care
expenditures each year (2000-2004) by gender and age category.[Footnote
45] Estimates of relative use were derived by dividing all estimates by
the average total health care expenditures for males ages 18 to 44 (the
comparison group). Second, reliance rates for DHP were provided by the
DOD from the annual Military Health Care Survey for active duty
personnel, their families, and retirees under 65 and their families.
To calculate the costs of future veterans' benefits for current active
duty servicemembers, including the costs for health care, compensation,
pension, and other types of benefits, we used notional costs as a
percentage of basic pay of accruing and actuarially funding VA benefits
in the DOD budget. The notional cost percentages we used were
unofficial Office of Management and Budget estimates. These estimates
were based on the most recent official percentages shown in table 12-2
of the 1999 President's Budget.
Determination of Active Duty Servicemembers' Perceptions of Their
Compensation:
To determine servicemembers' satisfaction and dissatisfaction with
components of their compensation, we reviewed past DOD surveys,
including the 2002, 2003, and 2004 Status of Forces Surveys. The 2002
survey administered to over 30,000 servicemembers had a response rate
of 32 percent. DOD has conducted and reported on research to assess the
impact of nonresponse rate on overall estimates. It found that, among
other characteristics, junior enlisted personnel (in pay grades E1 to
E4), servicemembers who do not have a college degree, and members in
services other than the Air Force were more likely to be
nonrespondents. We have no reason to believe that potential nonresponse
bias not otherwise accounted for by DOD's research is substantial for
the variables we studied in this report. Therefore, we concluded the
data to be sufficiently reliable for the purposes of this report. To
determine active duty servicemembers' perceptions of their
compensation, we conducted 40 focus groups at eight military
installations across all four services. We gathered supplemental
information from focus group participants through a survey that asked
questions to assess knowledge, individual opinions, and attitudes
toward compensation.
Focus Groups:
We conducted 10 focus groups with active duty servicemembers in each of
the four services, for a total of 40 focus groups. Focus groups involve
structured small group discussions designed to gain in-depth
information about specific issues that cannot easily be obtained from
single or serial interviews. As with typical focus group data
collection, our design involved multiple groups with certain
homogeneous factors--such as rank, service, and installation. Each
group was designed to involve 8 to 12 participants. Discussions were
held in a structured manner, guided by a moderator who used a
standardized list of questions. Our overall objective in using a focus
group approach was to obtain servicemembers' views, insights, and
feelings about military compensation.
Scope of Our Focus Groups:
To ensure we achieved saturation, the point where we were no longer
hearing new information, we conducted 40 focus groups with multiple
active duty servicemembers at eight military installations (see table
4). This design allowed us to identify differences in perceptions of
servicemembers in different branches of the military and in different
pay grades. In all focus groups, in order to hear from different
perspectives, efforts were made to select participants with differences
in sex, marital status, if the member lived on base or off base, and if
the member had been recently deployed. Focus groups were conducted from
November 2004 to March 2005.
Table 3: Composition of Focus Groups:
Service: Air Force;
Location: Pope Air Force Base, North Carolina;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7-E9: 1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: 5.
Location: Army: Scott Air Force Base, Illinois;
Servicemember pay grade: Enlisted: E1-E4: Army: 1;
Servicemember pay grade: Enlisted: E5-E6: Army: 1;
Servicemember pay grade: Enlisted: E7-E9: Army: 1;
Servicemember pay grade: Officer: O1-O3: Army: 1;
Servicemember pay grade: Officer: O4-O6: Army: 1;
Total: Army: 5.
Service: Army;
Location: Ft. Benning, Georgia;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7-E9: 1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: 5.
Location: Navy: Ft. Bliss, Texas;
Servicemember pay grade: Enlisted: E1-E4: Navy: 1;
Servicemember pay grade: Enlisted: E5-E6: Navy: 1;
Servicemember pay grade: Enlisted: E7-E9: Navy: 1;
Servicemember pay grade: Officer: O1-O3: Navy: 1;
Servicemember pay grade: Officer: O4-O6: Navy: 1;
Total: Navy: 5.
Service: Navy;
Location: Naval Station Norfolk, Virginia;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7-E9: 1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: 5.
Location: Marine Corps: Navy Region Southwest, California;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7- E9: M1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: Marine Corps: 5.
Service: Marine Corps;
Location: Camp Pendleton, California;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7-E9: 1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: 5.
Location: Camp Lejeune, North Carolina;
Servicemember pay grade: Enlisted: E1-E4: 1;
Servicemember pay grade: Enlisted: E5-E6: 1;
Servicemember pay grade: Enlisted: E7-E9: 1;
Servicemember pay grade: Officer: O1-O3: 1;
Servicemember pay grade: Officer: O4-O6: 1;
Total: 5.
Total;
Servicemember pay grade: Enlisted: E1-E4: 8;
Servicemember pay grade: Enlisted: E5-E6: 8;
Servicemember pay grade: Enlisted: E7-E9: 8;
Servicemember pay grade: Officer: O1-O3: 8;
Servicemember pay grade: Officer: O4-O6: 8;
Total: 40.
Source: GAO analysis.
[End of table]
Methodology of Our Focus Groups:
A guide was developed to assist the moderator in leading the
discussions. The guide helped the moderator address several topics
related to servicemembers' perceptions of their compensation including
their definition of compensation, sources of information on
compensation, satisfaction and dissatisfaction with compensation, and
any needed changes to compensation. Each focus group started with the
moderator describing the purpose of the study and explaining how focus
groups work. Participants were assured that all their comments would be
anonymous in that their names would not be used in write-ups of the
sessions or in the report. The participants were then asked open-ended
questions about their perceptions of military compensation. All focus
groups were moderated by a GAO analyst, while at least one GAO analyst
observed and took notes. After each focus group the moderator and note
taker reviewed the transcript together to verify that all comments were
captured.
Content Analysis:
We performed a systematic content analysis of discussions to categorize
and summarize participants' perceptions of their compensation. Using
the primary topics covered in the focus group guide, GAO analysts
reviewed responses from several of the focus groups and created a list
of subcategories within each of the primary focus group topics. A GAO
analyst then reviewed the responses from each focus group and assigned
each comment to a corresponding category. To ensure inter-rater
reliability, another analyst also reviewed each comment and
independently assigned it to a corresponding category. Any comments
that were not assigned to the same category were then reconciled and
adjudicated by the two analysts, which led to the comments being placed
into one or more of the resulting categories. Agreement regarding each
placement was reached between at least two analysts. The responses in
each category were then used in our evaluation of how servicemembers
perceive their compensation.
Limitations:
Methodologically, focus groups are not designed to (1) demonstrate the
extent of a problem or to generalize results to a larger population,
(2) develop a consensus to arrive at an agreed-upon plan or make
decisions about what actions to take, or (3) provide statistically
representative samples or reliable quantitative estimates. Instead,
focus groups are intended to provide in-depth information about
participants' reasons for the attitudes held toward specific topics and
to offer insights into the range of concerns and support for an issue.
The projectability of the information produced by our focus groups is
limited for several reasons. First, they represent the responses of
only the active duty servicemembers in our 40 focus groups. The
experiences of other active duty servicemembers who did not participate
in our focus groups may have varied. Second, while the composition of
the groups was designed to assure a distribution of active duty
servicemembers by several characteristics, including sex and marital
status, the groups were not randomly sampled.
Despite these limitations, we gathered data from a broad range of
servicemembers at several strata of the military hierarchy and obtained
a better understanding of how servicemembers perceive their
compensation and where they obtain information about their pay and
benefits. We were also able to obtain information complementary to the
Status of Forces Survey, which seeks information on satisfaction and
dissatisfaction among military servicemembers but does not address
reasons for these perceptions.
Use of a Survey to Supplement Focus Group Findings:
We conducted a survey of focus group participants to provide further
information on servicemembers' perceptions of their compensation. The
survey was administered and received from the universe of focus group
participants, which numbered 401. The survey collected additional
specific information on servicemembers' satisfaction and
dissatisfaction with their pay and benefits, sources of information on
their compensation, recommendations for changing compensation, and
demographic information.
Since the survey was used to collect supplemental information and
administered to focus group participants only, the results cannot be
generalized across the population of active duty servicemembers. The
results from this data collection effort represent only those who
participated in our focus groups.
The objectives of our survey were to collect (1) data that could not
easily be obtained through focus groups and (2) collect some of the
same data found in past DOD surveys.
The practical difficulties of conducting any survey may introduce
certain types of errors, commonly referred to as nonsampling errors.
For example, differences in how a particular question is interpreted,
the sources of information available to respondents, or the types of
people who do not respond can introduce unwanted variability into
survey results. To reduce nonsampling errors, we conducted five
pretests with active duty servicemembers, both enlisted and officers,
and revised it based on the pretest results. We also performed
statistical analyses to identify inconsistencies and had a second
independent reviewer for the data analysis to further minimize such
error. The surveys were administered in person directly after each
focus group session.
To analyze survey results, we ran frequencies for all questions and
highlighted those where a significant response occurred in a particular
category. We also compared responses by pay grade and service.
We conducted our review from August 2004 through May 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Sample of a Personal Statement of Military Compensation:
[See PDF for image]
[End of figure]
[End of section]
Appendix III: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
4000 DEFENSE PENTAGON:
PERSONNEL AND READINESS:
WASHINGTON, D.C. 20301-4000:
JUN 24 2005:
Mr. Derek B. Stewart:
Director, Defense Capabilities and Management:
United States Government Accountability Office:
Washington, D.C. 20548:
This is the Department of Defense response to the Government
Accountability Office (GAO) draft report, "Military Personnel: DoD
Needs to Improve the Transparency and Reassess the Reasonableness,
Appropriateness, Affordability, and Sustainability of Its Military
Compensation System," dated July, 2005 (GAO-05-798). The Department has
technical concerns with some of the calculations in the draft report,
but generally concurs with the recommendations. The Department's
comments are enclosed.
If you require additional information, please contact Dr. Saul Pleeter
at (703) 695-9371. The Department appreciates the opportunity to
comment on the draft report. Thank you for your interest in this
matter.
Sincerely,
Signed by:
William J. Carr:
Acting Deputy Under Secretary:
(Military Personnel Policy):
DEPARTMENT OF DEFENSE COMMENTS GAO DRAFT REPORT GAO CODE 350563/GAO-05-
798:
Subject: GAO Draft Report, "MILITARY PERSONNEL: DoD Needs to Improve
the Transparency and Reassess the Reasonableness, Appropriateness,
Affordability, and Sustainability of Its Military Compensation System,"
dated June 10, 2005 (GAO Code 350563/GAO-05-798):
Technical Issues: There are 3 main technical issues with the
presentation of the data in the draft report (see attached):
1. No acknowledgement of the Global War on Terrorism (GWOT) costs and
funding.
2. Use of end strength vice average strength (workyears) in per capita
calculations.
3. Constant dollar adjustments.
Recommendations:
RECOMMENDATION l: The GAO recommended that the Secretary of Defense
compile the total costs to provide military compensation and
communicate these costs to decision makers within the administration
and the Congress, perhaps as an annual exhibit as part of the
President's Budget submission to Congress. (p. 39/GAO Draft Report):
DOD RESPONSE: Partially concur. GAO's recommendation is to improve
transparency over total compensation. We agree with this goal. However,
since the costs for a military member extend to four departments,
including Treasury, Veterans Affairs, Labor and Housing and Urban
Development, this may be a more appropriate issue for the Office of
Management and Budget.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
assess the affordability and sustainability of the compensation system
and its implications on readiness as well as the reasonableness and
appropriateness of the allocation to cash and benefits and whether
changes in the allocation are needed to more efficiently achieve
recruiting and retention goals in the 215` Century. (p. 39/GAO Draft
Report):
DOD RESPONSE: Concur. We agree with GAO in the need analyze the
affordability and sustainability of the military compensation system.
DoD is already engaged in multiple simultaneous efforts to assess the
overarching military personnel compensation strategy including the
Defense Advisory Committee on Military Compensation, the Quadrennial
Defense Review and the 10th Quadrennial Review of Military
Compensation. DoD will continue to actively point out the impact of the
legislative process to Congress as we did with concurrent receipt, the
survivor benefit program and expanding retiree health care.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
develop a comprehensive communication and education plan to inform
service members of the value of their pay and benefits and the
competitiveness of their total compensation package when compared to
their civilian counterparts that could be used as a recruiting and
retention tool. (p. 40/GAO Draft Report):
DOD RESPONSE-Partially concur. All of the services currently have
multiple resources available for service members, including websites,
brochures and instruction. For example by linking through the Navy
Personnel Command Website members can access an electronic Pay and
Compensation Calculator at
http://www.npc.navy.mil/Careerlnfo/StayNavyTools/CareerTools. This tool
calculates the sum of members' pay and benefits and breaks them out by
direct, indirect, and deferred (retired) compensation. It also isolates
taxable and tax-free compensation and calculates the comparable
civilian wage that would have to be earned to match military pay and
allowances. Additionally, the annual "Career Handbook" supplement to
the Navy's monthly "All Hands" magazine was released in June 2005. The
supplement provides details on Navy compensation, including pay and
allowances, educational opportunities, career transition and retirement
benefits, as well as training, advancement, and commissioning
opportunities. DoD has also contracted with Ruehlin Associates to
provide "Career Planning and Management Seminars," during which the
total military compensation package is discussed as part of career
decision-making when considering transition to the private sector.
The Air Force mails an Annual Statement of Military Compensation every
spring to members. They also prepare a Compensation Fact Sheet
distributed to First Sergeants (posted to Air Force Personnel Center
Web site under enlisted/officer retention). Base Career Advisors
provide briefings to members 13 - 15 months prior to the DOS/EOS for
retention purposes.
The Army also sends out an annual report on compensation and maintains
a website offering additional information.
The Office of the Under Secretary of Defense for Personnel and
Readiness has a website that offers comprehensive information
concerning military compensation. There are nearly a million 'hits' to
this website each month. In spite of these and other efforts, there is
a perception that military compensation is underreported and
undervalued. DoD will explore an information/marketing campaign that
will improve understanding of the system.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Derek Stewart, (202) 512-5559 [Hyperlink, stewartd@gao.gov].
Acknowledgments:
Lori Atkinson, Alissa Czyz, Natasha Ewing, Alison Martin, David
Mayfield, Lindsey Mosson, James Pearce, John Pendleton, Charles Perdue,
Terry Richardson, Samuel Scrutchins, and Sonja Ware made key
contributions to this report.
[End of section]
Related GAO Products:
Defense Management: Key Elements Needed to Successfully Transform DOD
Business Operations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-629T]
Washington, D.C.: April 28, 2005.
Military Personnel: Preliminary Observations on Recruiting and
Retention Issues within the U.S. Armed Forces.
[Hyperlink, http://www.gao.gov/new.items/d05419t.pdf]
Washington, D.C.: March 16, 2005.
21st Century Challenges: Reexamining the Base of the Federal
Government.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP]
Washington, D.C.: February 2005.
Military Personnel: DOD Needs More Data Before It Can Determine if
Costly Changes to the Reserve Retirement System Are Warranted.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-1005]
Washington, D.C.: September 15, 2004.
Military Personnel: Survivor Benefits for Servicemembers and Federal,
State, and City Government Employees.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-814]
Washington, D.C.: July 15, 2004.
Military Personnel: DOD Has Not Implemented the High Deployment
Allowance That Could Compensate Servicemembers Deployed Frequently for
Short Periods.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-805]
Washington, D.C.: June 25, 2004.
Military Personnel: Active Duty Compensation and Its Tax Treatment.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-721R]
Washington, D.C.: May 7, 2004.
Military Personnel: Observations Related to Reserve Compensation,
Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-582T]
Washington, D.C.: March 24, 2004.
Military Personnel: Bankruptcy Filings among Active Duty Service
Members.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-465R]
Washington, D.C.: February 27, 2004.
Military Personnel: DOD Needs More Effective Controls to Better Assess
the Progress of the Selective Reenlistment Bonus Program.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-86]
Washington, D.C.: November 13, 2003.
Military Personnel: DOD Needs to Assess Certain Factors in Determining
Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-554]
Washington, D.C.: April 29, 2003.
Military and Veterans' Benefits: Observations on the Concurrent Receipt
of Military Retirement and VA Disability Compensation.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-575T]
Washington, D.C.: March 27, 2003.
Military Personnel: Management and Oversight of Selective Reenlistment
Bonus Program Needs Improvement.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-149]
Washington, D.C.: November 25, 2002.
Military Personnel: Active Duty Benefits Reflect Changing Demographics,
but Opportunities Exist to Improve.
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Washington, D.C.: September 18, 2002.
Military Personnel: Higher Allowances Should Increase Use of Civilian
Housing, but Not Retention.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-684]
Washington, D.C.: May 31, 2001.
Defense Health Care: Observations on Proposed Benefit Expansion and
Overcoming TRICARE Obstacles.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/T-HEHS/NSIAD-00-129]
Washington, D.C.: March 15, 2000.
Military Personnel: Preliminary Results of DOD's 1999 Survey of Active
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[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/T-NSIAD-00-110]
Washington, D.C.: March 8, 2000.
The Congress Should Act to Establish Military Compensation Principles.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/FPCD-79-11]
Washington, D.C.: May 9, 1979.
(350563):
FOOTNOTES
[1] The Military Retirement Reform Act of 1986, also known as REDUX,
had changed the retirement system by (1) reducing the amount received
at 20 years of service, (2) raising the growth in retired pay for each
year served after 20 years of service, and (3) reducing the real value
of retired pay in an inflationary environment.
[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[3] GAO, Key Elements Needed to Successfully Transform DOD Business
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005).
[4] Our average costs of compensation includes cash (e.g., basic pay,
housing allowance, and special tax preference), benefits (e.g., health
care, education assistance), and deferred benefits (e.g., contributions
to retirement pay) divided by the end strength. According to DOD, over
100,000 mobilized reservists have been paid out of active duty cash
compensation since fiscal year 2002. If these personnel were included,
the average cost would be about $5,000 lower in fiscal year 2004.
[5] Congressional Budget Office, Growth in Medical Spending by the
Department of Defense (Washington, D.C.: September 2003).
[6] Office of the Under Secretary of Defense for Personnel and
Readiness, The Report from the Ninth Quadrennial Review of Military
Compensation (Washington, D.C.: May 2002).
[7] The federal tax advantage is the additional income servicemembers
would have to earn if their allowances for housing and subsistence were
subject to federal income tax.
[8] Pub. L. No. 93-419 (Sept. 1974).
[9] The combat zone tax exclusion allows servicemembers to exclude
income earned--including basic pay, bonuses, special pays, and
allowances--for each month served in a designated combat zone.
Servicemembers who serve a minimum of 1 day in a combat zone are
eligible to receive the combat zone exclusion for the respective month.
Enlisted members' exclusions are not limited; however, officers can
exclude up to the maximum earned by the highest enlisted member.
[10] GAO, Business Modernization: NASA's Integrated Financial
Management Program Does Not Fully Address Agency's External Reporting
Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 2003). The Statement of
Federal Financial Accounting Standards Number 4, Managerial Cost
Accounting Standards, requires agencies to report the full cost of
their programs in their general-purpose financial reports aimed at
assisting congressional and executive decision makers in allocating
federal resources.
[11] Accrual funding sets aside monies for future obligations.
[12] Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001, Pub. L. No. 106-398, Sec. 712 (Oct. 2000)
[13] GAO, The Congress Should Act to Establish Military Compensation
Principles, GAO/FPCD-79-11 (Washington, D.C.: May 9, 1979).
[14] Department of Defense, Office of the Secretary of Defense,
Military Compensation Background Papers: Compensation Elements and
Related Manpower Cost Items, Their Purposes and Legislative
Backgrounds, sixth ed. (Washington, D.C.: April 2005).
[15] GAO, Key Elements Needed to Successfully Transform DOD Business
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005).
[16] Our calculations of compensation costs include supplemental
funding for the war on terrorism. According to DOD officials, in fscal
year 2004 of the $158 billion over $17 billion was supplemental
funding.
[17] Our cost calculations capture cost to the federal government. As a
result, we included costs assumed by other areas of government to
compensate active duty servicemembers. These costs include the lost tax
revenue because housing and subsistence allowances are not subject to
federal income tax or Federal Insurance Contributions Act (FICA) tax as
well as the estimated accrual cost of providing compensation--such as
pension and health care--through the VA.
[18] We adjusted for inflation using DOD's military personnel (MILPERS)
deflator. Between fiscal years 2000 and 2004 military pay increases
averaged over 21 percent. This compares to a 9.7 percent increase for
fiscal years 2000 through 2004 for the all urban workers Consumer Price
Index (CPI) and a 13.3 percent increase in the Employment Cost Index
(ECI) for civilian wages and salaries over the same period.
[19] GAO, Military Personnel: Higher Allowances Should Increase Use of
Civilian Housing, but Not Retention, GAO-01-684 (Washington, D.C.: May
31, 2001).
[20] GAO, Defense Health Care: Observations on Proposed Benefit
Expansion and Overcoming TRICARE Obstacles, GAO/T-HEHS/NSIAD-00-129
(Washington, D.C.: Mar. 15, 2000).
[21] Congressional Budget Office, Growth in Medical Spending by the
Department of Defense (Washington, D.C.: September 2003).
[22] In fiscal year 2003, DOD began budgeting for the accrual cost of
health care for retirees over age 65 and their dependents. This cost is
in the military personnel budget. However, health care for retirees
under 65 and their dependents is not currently budgeted for on an
accrual basis.
[23] GAO, Military Personnel: Active Duty Benefits Reflect Changing
Demographics, but Opportunities Exist to Improve, GAO-02-935
(Washington, D.C.: Sept. 18, 2002).
[24] Department of Defense, Office of the Secretary of Defense,
Military Compensation Background Papers: Compensation Elements and
Related Manpower Cost Items, Their Purpose and Legislative Backgrounds
(Washington, D.C.: Sixth edition, April 2005).
[25] John T. Warner and Saul Pleeter, "The Personal Discount Rate:
Evidence from Military Downsizing Programs," The American Economic
Review (March 2001).
[26] GAO, Military Personnel: Active Duty Benefits Reflect Changing
Demographics, but Opportunities Exist to Improve, GAO-02-935
(Washington, D.C.: Sept. 18, 2002).
[27] John T. Warner and Saul Pleeter, "The Personal Discount Rate:
Evidence from Military Downsizing Programs," The American Economic
Review (March 2001).
[28] These percentages are based on a typical group of new entrants and
do not include those military personnel who began their careers on
active duty then moved to the reserves and retired from there.
[29] Improve Base Pay Return on Investment by Increasing Employee
Knowledge. WorldatWork, 2002. Creating an Effective e Statement: A
Primer. Watson Wyatt World Wide 2004.
[30] "My Pay" is a Web site maintained by DOD's Defense Financial
Accounting Service. It provides servicemembers online access to their
Leave and Earnings statements as well as other related compensation
issues--such as tax deductions.
[31] Annual earnings statements called the Personal Statement of
Military Compensation are mailed to Army, Air Force, and Marine Corps
servicemembers annually and provide them personalized information about
the amount of cash pay they receive as well as general information
about the value of their benefits. For example, servicemembers are
provided an estimated value of their health care if they were to buy
similar coverage in the civilian market.
[32] GAO, Military Recruiting: DOD Needs to Establish Objectives and
Measures to Better Evaluate Advertising's Effectiveness, GAO-03-1005
(Washington, D.C.: Sept. 19, 2003).
[33] In fiscal year 2000, the Secretary of Defense introduced an
initiative to increase housing allowances so that servicemembers would
be paying nothing out of pocket for rent and utilities by fiscal year
2005.
[34] The current retirement system requires servicemembers to generally
serve 20 years before becoming eligible for nondisability retirement
pay and benefits.
[35] John T. Warner and Saul Pleeter, "The Personal Discount Rate:
Evidence from Military Downsizing Programs," The American Economic
Review (March 2001).
[36] We asked focus group participants to identify their civilian
counterparts and how their pay compared with the counterpart they
identified.
[37] Between fiscal years 2000 and 2004 military pay increases averaged
over 21 percent. This compares favorably to the 9.7 percent increase in
the urban workers Consumer Price Index (CPI) over the same period.
Subtracting the 9.7 percent from the 21 percent yields the real wage
growth of military personnel of over 11.3 percent. Compared to the
Employment Cost Index (ECI) military wages grew over 7.7 percent more
(21 percent minus 13.3 percent) than did civilian wages and salaries
over the same period.
[38] Officers were compared with civilians who have 4-year college
degrees, while enlisted members were compared with civilians who have
high school diplomas and some college.
[39] The Department of Veterans Affairs offers different programs to
active duty members such as the Montgomery GI Bill, which provides
education assistance, and a guaranteed home loan program, which
provides government-backed mortgages to buy homes.
[40] NBER's TAXSIM Model simulates the U.S. federal income tax rules.
See Daniel Feenberg and Elisabeth Coutts, "An Introduction to the
TAXSIM Model," Journal of Policy Analysis and Management, Volume 12,
No. 1, 1993 pp. 189-194.
[41] In the case where servicemembers are eligible for the Earned
Income Tax Credits (EITC), any extra income would likely result in a
lower marginal tax rate, because of the structure of the EITC phase-
out.
[42] The first dependent is assumed to be a spouse. Other dependents
are assumed to be children.
[43] The age categories used are: 0 to 17 years old, 18 to 44 years
old, 45 to 64 years old, and over age 65.
[44] See Congressional Budget Office, "Growth in Medical Spending by
the Department of Defense," appendix B (2003) for a more extensive
discussion of this methodology.
[45] The 2002 estimates are used for 2003 and 2004, because MEPS data
for those years have not been released. There is no apparent trend in
the relative use data and using an average over previous years did not
affect the results.
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