One problem with economic crises is that their urgency diverts energy from less dramatic issues. With the current focus on bailouts and stimulus packages, Congress and the Obama administration probably will let issues raised by the 2008 Quadrennial Review of Military Compensation gather dust. That would be a mistake with potential for enormous long-run costs.
Structuring pay to get needed workers and give them the right incentives isn’t easy, but it is particularly knotty in large hierarchical government organizations such as the armed forces, for which changes can be made only by Congress.
A key problem is that while we decided 35 years ago that we did not want to conscript anyone into the military, we are not paying enough right now to get enough people to meet the needs of our defense policy. For years, we have been short of troops for what we want to accomplish in Afghanistan and are paying the price now. Active and reserve units are overstretched. The one-fourth of 1 percent of the U.S. population actually serving in units that face combat bear a disproportionate burden.
We are particularly short of key young officers. The active Army alone is short some 3,000 majors and nearly 1,000 captains. The Army Reserve and National Guard are short another 6,000 majors and 11,000 captains. The Army Guard has only 55 percent of the captains it is authorized. The Marines also are short of officers, although not as badly as the Army. The Navy and Air Force, which on the whole are exposed to much less danger in Iran or Afghanistan than the Army or Marines, generally have the people they need.
That comes back to the problem of designing a pay system for a large organization when you are short of people in a few specific areas. One solution is to increase use of what the military calls “special pay.”
There always have been supplements to basic pay for highly educated specialists — doctors and lawyers — and for people who fly airplanes, jump out of them, dive into the ocean or dispose of explosive ordnance. There long has been pay for exposure to hostile fire, and so on.
The problem is that such pay only makes up 5 percent of total military compensation. If we are short of ground forces that face greater combat danger, then we should increase that special pay. If good people are bailing out of Guard and reserve units because of how frequently they have been activated and sent to Iraq or Afghanistan, then we could pay increased amounts for separation from families, and so on.
Similarly, if there are shortages for certain ranks, we could structure retention bonuses to increase the effective pay for these positions.
We could, of course, simply increase base pay for everyone in the armed forces. But across-the-board increases needed to fill existing shortages in critical areas would overcompensate many others. However much it might be deserved or appreciated, it is not an efficient use of public funds.
Across-the-board base pay increases also boost military retirement outlays, because the initial retirement pay of military personnel depends on their base pay and years of service. In general, the formula is 2.5 percent of base pay per year of service, so that 20 years qualifies one for 50 percent of base pay, 30 years boosts that to 75 percent, and so on.
Once retired, annual cost-of-living increases are tied to the Consumer Price Index rather than changes in military pay. But a large increase in base pay for everyone would be a windfall to those nearing retirement even if their particular skills are not in particularly short supply. (By way of disclosure, as a reservist who will draw retired pay once I am age 60, I fall in that category.)
That brings us to a second key area for change, military retirement. The half-pay-after-20-years policy is rooted in the practice of the British and Dutch navies three centuries ago. It strikes some civilians as overly generous, although critics don’t batter down the doors of recruiting stations to avail themselves of the largesse.
But it is rigid in that if you do not put in the 20 years, you get nothing. There are few civilian pension plans with a 20-year wait for vesting.
One problem is that for young recruits, the incentive effects of a pension 20 years down the road are pretty small. If you are 19 years old, you typically have a short planning horizon, and the promise of something when you are 40 is indistinct.
One option would be to restructure military retirement along the lines of civilian 401(k) plans, in which, after some vesting period, service members would get some amount if they got out in midcareer.
Yes, this would run counter to the immediate problem of too many midcareer officers bailing out. The problem is that the very large retirement outlays we have now don’t produce much in terms of incentives to bring young people into the service in the first place.
These are the sort of details that experienced congressional armed service committee members need to grapple with. The current system isn’t meeting the nation’s needs, but the general public does not realize this. Unfortunately, the issues are likely to be ignored in our focus on problems in the general economy.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.