Time for Hard Choices on Payroll Crisis

In the next few months, the Army is anticipating a personnel payroll shortfall of up to $1.4 billion for the active-duty force and up to $500 million for the National Guard and Reserve.

The Marines are facing a potential shortfall of more than $100 million in those budget accounts.

These deficits arose from a perfect storm in which a series of entitlements and pay packages converged with a far longer and more hazardous than expected deployment of our military to Iraq and Afghanistan.

Unfortunately, we will face ever larger shortfalls until we confront some inconvenient truths about why this is happening.

Deputy Defense Secretary Gordon England deserves credit for personally reaching out to key congressional leaders to communicate the urgency of this situation. In part because of his efforts, the wartime supplemental spending bill that President Bush signed June 15 contains a provision that grants the Defense Department expanded authority to transfer money within its budget to cover these looming military payroll shortfalls.

This increase in transfer authority — to $5 billion from $3.75 billion — far surpasses what was agreed to by either chamber earlier this year. In March, the House opposed any addition, and the Senate drew the line at a $600 million increase in May.

The shift is certainly not because of any newfound willingness by the appropriation committees to relinquish budgetary power to the Pentagon. Rather, it’s the result of a belated recognition that the military’s personnel costs are spiraling out of control and that ignoring this fact jeopardizes our troops.

It is unthinkable to reduce military pay and benefits at this moment, but now is indeed the time to take stock of the policy decisions that have led to this crisis point.

First, the Pentagon is shouldering the ongoing expenses of two late Clinton-era initiatives. One of these reversed a 1986 cost-saving decision to cut the percentage of base pay received by retired military personnel after 20 years of service to 40 percent from the traditional 50 percent. This reversal not only saddled the Pentagon with higher retirement costs for current and future personnel, it also mandated retroactive retirement payments to cover the 10 percent difference over the previous 13 years.

The other initiative, Tricare for Life, guarantees all retired military personnel who are Medicare-eligible the right to continue receiving Pentagon-subsidized health care and prescription drug coverage. This program is part of the reason that military health care costs have risen from $19 billion in 2001 to almost $42 billion in 2006.

Second, in 2003, the Pentagon lost the ability to lean on the Department of Veterans Affairs to help offset the cost of military retirement packages. Previously, the Pentagon saved money by reducing retirement pay for disabled military members who also received a VA disability pension. This policy shift cost the Pentagon a subsidy worth $1.8 billion to $5 billion per year.

Third, the war in Iraq has made recruitment and retention increasingly expensive. The Army spent nearly $492 million on selective re-enlistment bonuses for active-duty service members in 2005, more than double the amount spent in 2004 and more than four times the 2003 level. In addition, the Army is now offering enlistment bonuses of up to $40,000 and college assistance worth up to $71,000, even as it has reduced its minimum service requirement from 24 months to 15 months.

Fourth, the middle and upper ranks of the Army are swelling disproportionately. Personnel who would otherwise leave are now being enticed by an expedited promotion schedule and monetary incentives to stay longer to compensate for shortfalls in recruitment and first-term re-enlistment.

For instance, last year, 97 percent of eligible Army captains were promoted to major. Military personnel are paid according to rank and seniority, so this trend is doubly costly. Moreover, this shift in the composition of the military indicates that the recruitment and retention problems are not being fundamentally addressed and will be costly for years to come.

This is not to suggest that any of these entitlements, bonuses or other benefits should be reduced. Rather, Congress needs to confront the ballooning personnel costs and make some hard choices about how to either pay for them or rein in other parts of the defense budget.

The Pentagon, for its part, must make meeting these escalating costs an integral part of its military planning. This applies to its military transformation project in particular: The Army’s reorganization into a modular force with smaller, more frequently deployed units will further strain its personnel budget.

In the long term, the Pentagon cannot depend on last-minute appeals to Congress to shift money from one account to another, in effect robbing Peter to pay Paul.

Lawrence J. Korb, top, an assistant secretary of defense during the Reagan administration, and Peter Ogden work on national security issues at the Center for American Progress in Washington.

This column has been reprinted with permission from Army Times.

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Lawrence J. Korb

Senior Fellow

Pete Ogden

Senior Fellow