Cap Increases in Military Basic Pay

Between 2001 and 2009, per capita spending on three major components of cash compensation for active military personnel rose by 37 percent in inflation-adjusted dollars. Those components are basic pay and the basic allowances for housing and subsistence, of which basic pay is the largest element, averaging more than 70 percent of the total. Lawmakers typically use the percentage increase in the employment cost index (ECI) for private- sector workers' wages and salaries as a benchmark for setting the annual increase in basic pay. In the 1990s, the military pay raise was generally set equal to the increase in the ECI or 0.5 percentage points below that amount. Over the past decade, in each calendar year from 2001 through 2010, lawmakers approved pay raises-- including across-the-board increases and, on occasion, amounts targeted toward certain seniority levels--that exceeded the ECI by 0.5 percentage points for the average service member. Those pay increases boosted outlays not only in the years in which they took effect but also in subsequent years as the raises compounded.

Another element of cash compensation is the selective reenlistment bonus (SRB), an incentive typically offered to qualified enlisted personnel working in occupational specialties that have high training costs or demonstrated shortfalls in retention. Each service branch regularly adjusts its SRBs to address current retention problems, adding or dropping eligible specialties and raising or lowering bonuses. In addition, the Army pays a location- specific SRB to all eligible soldiers who reenlist while they are deployed to certain locations, such as Afghanistan, Iraq, or Kuwait. Depending on the service branch, eligible personnel either receive the bonuses in a lump sum when they reenlist or receive half at reenlistment and the remainder in annual installments over the course of the additional obligation.

This option would cap the basic pay increase over a four- year period: Specifically, from 2012 through 2015, basic pay raises would be set at a rate 0.5 percentage points below the increase in the ECI. Implementing this option would require new legislation to override current law, which stipulates that annual pay raises match the increase in the ECI. Although the prospect of lower basic pay raises would probably adversely affect retention, the effect is likely to be small. To alleviate any effect on retention during those four years, the service branches could increase bonuses for enlistment and reenlistment, step up recruiting efforts, or offer other benefits to service members. In estimating the budgetary impact of this option, the Congressional Budget Office assumed that the service branches would be able to keep overall retention constant through 2015 by boosting their spending on reenlistment bonuses while removing current restrictions on the maximum size of each bonus award.

If implemented, the option would generate net savings of about $6 billion between 2012 and 2016 and $17 billion over the 2012-2021 period. Included in those figures are added costs for bonuses totaling about $920 million between 2012 and 2015 to offset the effects on retention of the lower pay raises for service members who had enlisted or previously reenlisted during the earlier period when pay was rising at the ECI rate or faster. Service members eligible for the additional bonuses between 2012 and 2015 would receive higher overall pay than would be the case had pay kept pace with the ECI. After the four-year transition period, people would base their reenlistment decisions on a level of pay that was lower than would otherwise have prevailed. Although the lower pay could adversely affect recruiting and retention levels in future years, based on the success of DoD's personnel management over the past several years--and the decline in the number of personnel deployed to Iraq and Afghanistan--CBO anticipates that DoD would be able to attain the desired levels in 2016 and beyond without continuing to pay the additional bonuses.

The rationale for this option is that, although DoD must offer a competitive compensation package to attract and retain the military personnel it needs, the annual increase in the ECI is not an appropriate benchmark for setting pay raises over the long run. The comparison group for the ECI includes a broad sample of civilian workers who, on average, are older than military personnel and more likely to have college degrees. Those workers have historically received larger pay increases than the younger workers who more closely match the demographic profile of military personnel. According to CBO's analysis, median cash compensation for military personnel--including the tax-free cash allowances for food and housing--exceeds the salaries of most civilians who have comparable education and work experience.

Another advantage of this option is that, by using SRBs to direct compensation to service members who are at a career decision point, as well as to specific occupational categories that are experiencing shortages, this option could maintain retention goals at a lower cost than the

current plan that uses across-the-board pay raises to achieve retention (and other) goals. General pay increases would alleviate shortages in some occupations but would worsen surpluses in others. Also, unlike pay increases, bonuses would be more easily adjusted from year to year to match recruiting and retention goals. Finally, bonuses would avoid the added cost of elements of compensation, such as retirement benefits, that are tied to basic pay.

An argument against this option is that expansion of reenlistment bonuses at the expense of across-the-board increases in basic pay would amplify pay differences that exist among occupations and thus counter the military tradition of paying similar amounts to personnel with similar levels of responsibility. Capping basic pay would also reduce other benefits--including retirement annuities--that service members would receive throughout their career. Another argument is that the risks service members may be exposed to when overseas contingency operations are under way justify the across-the-board pay increases specified in current law.