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The path to a more efficient Pentagon

February 18, 2011

The Hill, 17 feb 2011: More than half of the Pentagon budget is spent on people – pay, health and pension benefits, housing, and a wide array of family support programs from commissaries to day care to hobby shops. There is broad acknowledgement that people are our most potent weapon, so it should come at no surprise that defense is labor intensive.

But, as with weapons systems, we must apply strong efficiency and effectiveness standards to people programs, ensuring that the Pentagon manages recruiting and retention to get the most capable force for the money.

In the budget he released on Monday, Defense Secretary Robert Gates made a down payment on reducing unnecessary personnel costs. But he has failed so far to take a strategic look at the policies and processes that underlie the All Volunteer Force or to ask all the hard questions of whether we are really getting the force we need and can afford.

Over the past decade, American industries have collapsed under the weight of retiree health care costs, and American families have endured staggering health care cost inflation. Meanwhile, with the Pentagon’s acquiescence or encouragement, Congress has expanded the TRICARE health program to fully cover working-age military retirees and to supplement Medicare costs for aging retirees. And TRICARE beneficiaries pay the same premiums today – $230 for an individual and $460 for a family – that they did in 1995. Co-pays have been similarly untouched.

The Pentagon’s 2012 budget request introduced on Monday proposes to change these fees, increasing annual TRICARE premiums by $30 for individuals and $60 for families and then indexing them to inflation in Medicare moving forward.

This is a step in the right direction, saving $434 million over five years. Fully restoring the cost-sharing ratio that working-age military retirees paid in 1995 would generate far more savings, though – six billion dollars by 2018. Another four billion dollars could be saved by asking aging retirees to share costs with TRICARE in the same ratio they do with Medicare.

Secretary Gates next must turn to the restructure the military personnel system. It is anchored on an inefficient and inequitable military compensation and retirement scheme, making it ineffective at its primary purpose of managing the composition of the military workforce. This creates mountains of waste. We send many of our best performers home just when they become most productive, and we keep many others for longer than they are needed.

The military retirement system allows the small percentage of individuals who serve for 20 years, occasionally those as young as age 38, to collect an inflation-adjusted payment for the rest of their life. Some of these people have badly-needed skills in professions like strategy and planning, intelligence analysis, languages, medicine, and law. They could serve productively for another 20 years, but most opt to begin collecting the retirement package and many then pursue second careers as defense contractors. Meanwhile, the retirement system provides nothing for the 85% who leave the force before 20 years of service.

Compensation offered to currently serving personnel also needs to be managed better. Roughly half of this compensation comes as cash, and the rest is paid through in-kind services such as health care, childcare and deferred retirement benefits. But everyone, service-members included, prefers compensation that they can spend at their discretion, and only cash provides that flexibility. As a consequence, recipients value the non-cash part of military compensation less than it costs to provide it.

This is a hallmark example of government waste – and the reason that personnel can feel undercompensated despite the Congressional Budget Office’s recent finding that service-members are paid better than three-quarters of their peers.

Moreover, military compensation has only the weakest connection to personnel supply and demand needs. Less than ten percent of compensation is targeted to the skills and experience most in demand. Extra pay for combat service is the exception, while across-the-board pay raises are the rule.

Compensating the force with more cash than non-cash benefits and allowing the principle of supply-and-demand to govern pay adjustments would put more money in the pockets of the skilled personnel we need the most and could save as much as $5 billion per year – while giving us a force better matched to the rapidly changing demands of the 21st century world.

Today’s All Volunteer Force is far more professional and competent than the conscripts it replaced.  We should expect to pay more for it and, without reservation, we owe our volunteers equitable compensation. Still, we pay substantially more than is needed or fiscally responsible.

Taxpayers are right to demand better discipline. Balancing these principles will require a new compact with the military, one that costs less and appropriately accounts for other priorities inside and outside the Pentagon.

 

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