Monday, May 3, 2010

Is the AVF Fiscally Sustainable?

I've posted in the past that when Nixon was tossing out his campaign pledge of eliminating the draft, then COL Jack Vessey questioned, during a conversation amongst a group of us, whether we could afford the ultimate payroll costs. His premise was that in order to be "competitive" with civilian sector compensation, the necessary compensation for E-1 through E-4 to stimulate enlistments would drive the whole pay structure through the ceiling, to include the ultimate retirement costs as well. Overall, he predicted cuts in the classic 50% at 20 years service retirement, which was first done in 1980, as well as other benefit cuts.

To stem the bleeding that the pension base caused, annual pay increases, which were adjusted to place all the increase into base pay (from which pensions were calculated) were soon spread across both base pay and non-pension generating allowances. Thus, on retirement day, an E-7 who was receiving about $6,000/month in base pay and allowances, would have his retirement computed only on the $4,100 that represented base pay. Not a complaint, but an observation.

It would appear that Vessey was spot on, as there has been for a while serious concerns over the payroll costs. Rummy resisted end strength increases, less it take away from his hardware desires. Columnist David Wood recently wrote this piece on the subject.

We've discussed the socio-political aspects of the AVF. Now, perhaps, there might be economic discussion as well?


  1. No, it's not sustainable for no other reason than our federal spending more generally isn't sustainable. I think military compensation needs a serious examination and, like government worker pay and benefits more generally, has overtaken the private sector in the past ten years. Granted, some people, like my nuclear engineer wife, could make a lot more on the outside, but the advantage isn't as clear as it once was. And it's likely she'd be working for a government agency or a contractor anyway, so she'd be getting the same milk, only from a different titty.

    I think we need to quit the annual pay increases (2-5% depending on the year) and look at serious reform in special pays, bonuses and retirement benefits. Medical care cost increases is a big concern. Costs for retiree pay combined with medical care for the active force together are almost $100 billion. I think the current retirement system will have to be reformed and there are a lot of negative effects from requiring 20 years for vestment (ie. careerism).

    The biggest money savings, though, is simply to reduce the size of the force which will require a reduction in our overseas commitments. I would like to see, eventually, a much smaller active force and a larger reserve force. For reasons stated in the other thread I'm not a supporter of a peacetime draft.

    At the end of the day, our current federal spending is unsustainable and sooner or later serious choices will no longer be avoidable. The military is going to see some serious budget cuts, the only question is when. My guess is about a decade but that is just a guess.

  2. The level of military spending is closely connected with two basic strategic assumptions:

    The first, best said by Rumsfeld in 2004, "This much is certain, Coalition forces cannot be defeated on the battlefield. The only way this effort could fail is if people were to be persuaded that the cause is lost, or that it's not worth the pain - or if those who seem to measure progress in Iraq against a more perfect world convince others to throw in the towel."

    So "we can only defeat ourselves by admitting defeat", and the second assumption, closely related . . .

    "If we give up the fight in the streets of Baghdad, we will face the terrorists in the streets of our own cities. The security of the civilized world depends on victory in the war on terror, and that depends on victory in Iraq, so America will not leave until victory is achieved." echoed by Bush in September 2006.

    That is, "if we don't fight them over there (where ever we happen to be fighting) we will end up fighting them in CONUS".

    These two assumptions form the key to post-9/11 US national security policy at least as far as how it is presented to the public. While both are logically absurd, both are still shared wholeheartedly and unquestioningly by our political and media elite. Obama hasn't really changed anything.

    Add this to Cheney's view that, "You know, Paul, Reagan proved deficits don't matter," and you have all the makings for policy inertia in terms of the AVF, at least until one of the institutions deemed "too big to fail" fails.

  3. Who pays (and how much) for NG and Reserve forces? Is their active-duty pay the same as Regulars of the same rank? Do the states pick up some of the cost of the the NG?

    What I'm getting at is the fact (so I was told in the old INTEL Dump) that these backup forces were never intended to be used in the way they are being used in Iraq and Afghanistan, and their over-use may have a bearing on the Defense budget.

    If the US government picks up the cost for all this, one might hope that AVF costs would go down with the arrival of a moderately sane administration.

    Note that I'm not saying Obama's is not necessarily one such, except when compared to the previous one.

    I'm trying to understand whether sustainability problems are, at least in part, a result of misuse of parts of the military.



  4. JP,

    Who pays can get a bit complicated, especially with the Guard. The feds pay for the vast majority of even the Guard costs and all the reserve force costs. The personnel costs are much lower, however, because most of us (I'm in the Guard) are part-timers. If I am a traditional guardsman, I am on duty 2 days a month, for which I receive 4 days pay, which is prorated from from the same pay scale as the active forces.) I also have to do two weeks per years in addition to the 2 days per month. I only have medical coverage while on duty, though I can buy into the active-duty Tricare program. The guard and reserve don't get retirement pay and benefits after 20 years like the active forces. We can still "retire" after 20 years, but the benefits don't kick in until age 58 (IIRC).

    There's no doubt the reserve forces (reserve and guard) are used much more now which brings its own set of problems.

  5. Also, to be clear, if I am called up I do receive the same pay and benefits as the active duty folks, except for retirement. That includes a housing allowance and/or per diem.

  6. Andy-

    Keep in mind that the payroll costs of the Reserve components have risen dramatically as a result of the AVF as well. First of all, RC pay is based upon the active component pay scales. Second, the RC is now having to provide expanded benefits and enlistment and re-enlistment bonuses to attract members.

    The concern being expressed is about the authorized Active Component end strength personnel costs. Mobilized RC personnel are a separate appropriation. Rummy did not want to raise end strength for precisely that reason.

    I know you weren't around in the days of conscription. Pay for E-1 through E-3 was basically three hot meals, a bunk in the barracks and pocket change. We did not qualify for a housing allowance, and if married, we only received a modest extra allotment that had to be send home to momma. There was no attempt to pay an amount sufficient for an E-1 thru E-3 to support a family. It was considered "national service", and part of that "service" was financial sacrifice. I'm not arguing which is better, just stating simple fiscal facts.

    In order to meet enlistment goals, the DOD spends hundreds of millions on recruiting activities and bonuses. Additionally, they have had to raise the initial entry pay rates to compete with the civilian sector. These increases have been seen in the Reserve Components as well. Yes, the drilling reserve per capita personnel costs are less than the Active Component, but it is also many, many times higher, in constant dollars, than they were before the AVF, and rising to a level where it may require RC cuts as well. In fact, if one did it from a pure cost effectiveness computation, the increase in the RC personnel costs might very well less effective than the AC costs, considering that they are not available 100% of the time.

  7. Al,

    I don't think you are the only one concerned about this. The proposal for the 2011 pay raise for DoD is only 1.4%, the lowest pay raise since the AVF started.

  8. Dirty little secret: the necessary predicates of the AVF are that (1) it remains small; (2), that it so frightens any potential adversary that it will never need to be used. We've done well with (1) and (2), but it seems we somehow missed (3), which is where elected officials somehow missed out on (1) and (2) and decided to use the AVF in foreign adventures for which it was never intended.

    Yeah, Nixon did it, but he was running from both Vietnam and Watergate. Pay more attention to the Weinberger doctrine. Neither Nixon nor Weinberger ever expected the AVF to be squandered in "small wars." The expectation in fact was that the AVF would be so awesome that it would dissuade anyone from taking the U.S. on. This made all of the sense in the world in the post-Vietnam context, where policy dudes never dreamed that future national leaders would be so stupid as to put the AVF out there chasing backwoods tribesmen and third-world dictators.

    There was a plan.

    And then there is inflation. Unfortunately, actuaries and economists don't get to run politics. You know, it's not just military salaries, etc., that do the old ka-ching, ka-ching, on the national security register. How about weapons acquisition? In 1990, I was a senior manager with a major hardware contractor; as the guy in charge of so-called special programs, I was responsible for devising methods of ensuring that approved "black programs" remained that way. I made $80K per year. Interestingly, although I made $40 an hour, an hour of my labor (I was direct cost) cost the government customer from $135 to $150 an hour. Overhead, etc., you know. $200K a year for me. Inflation has been about 80% since then. This means a guy like me probably makes near $150K, plus the add-ons. He costs near $350K a year.

    I'm just talking salaries here. Think about raw materials, etc. This defense and war shit is expensive. Everybody does understand that friend BG is making more than $100K a year, right? I don't begrudge him that (see above), but multiply him by hundreds of thousands.

    Medicare and Social Security are in the same boat. People live too long and medical costs rise. Nobody ever honestly accounts for inflation. Nobody. And then of course, politicians such as George Bush stroll in and say, "Hey, let's cut taxes." And the rest of the herd says, "Shit, why didn't we think of that?"

    Ain't just in the U.S. It's everywhere. Dishonest politicians and voters who don't want to ask the hard questions. The only glimmer of light I see in this whole kerfluffel is that maybe people in the U.S. will start asking hard questions about benefits and use of the military.

    Nah. What was I thinking? WASF. Print more money.

  9. bg: I don't think you are the only one concerned about this.

    Obviously the very existence of the article I linked shows others are concerned. I would offer that Rummy's thick headed refusal to ramp up end strength showed he was concerned - perhaps not for the reasons I am, but still concerned. Hell, COL (later JCS Chair) Vessey was concerned in 1970.

    We have, in some respects, put the personnel account at the mercy of market forces, and, as Alan Greenspan recently confessed, the "market" can sometimes become the enemy.

    Here’s some real figures:

    1967 Median Individual income (males) $6,007 (In 2006 Dollars = 30,977)

    My pay statement (1967) as WO1 over 7 years:
    Base Pay $387 BAS 47.88 BAQ 110.00
    Total pay and allowances = $544/mo or $6,528/yr
    10% higher than median wage

    2009 Median Individual income (males) $42,500

    2010 Pay table for WO1 over 7:
    Base Pay 3694 BAS 223.00 BAQ 1428
    Total pay and allowances = $5345/mo or $64,140/yr
    50% higher than median wage

    My previous pay as E-5 over 6 (1966)
    $286/mo (no allowances as I was single, living in barracks)
    Total Pay = $3440/yr or 57% of median wage

    However, a married E-5 would receive about $130/mo in meals and quarters allowances, raising annual pay to about $5,000 or 83% of median.

    2010 Pay tables E-5 over 6
    Base pay = $2584/mo or $31,008/yr = 73% of median wage

    However, a married E-5 would receive about $1464/mo in meals and quarters allowances, raising annual pay to about $48,573 or 14% above median.

    Lastly, about 68% of the AVF active Army is married and another 5 to 7% are single parents. It would be interesting to compare the resulting per service member dependent stats from 2010 to 1966. I lived in a barracks with the bulk of my platoon in 1966.

    Just some cost escalation numbers to ponder. I am not making a case for or against, but trying to gauge the real size of Vessey's predicted cost increases.

  10. Al's given some good figures on active duty pay. I didn't know I made so much back in the day (looking at the inflationary effect over the years). Actually, maybe we never were all that underpaid, even though we thought so. I bought my first house in 1973, in the D.C. area. I think I was making like $1K a month. House payment was $268. Also had a car payment of $75 or so. Commissary run for the month cost another $75. With a little one at home, wife didn't work, either.

    The so-called "pay comparability" issue continues to burn. For example, Bg gives us the proposed pay raise for next year: 1.4% At the same time, I'm getting email from MOAA (Mil Officers Assn) telling me to tell Congress that's not enough. There's a whole lot of humma-humma involved here, but the bottom line is, "nothing's too good for the troops, especially in time of war." I'm all over that one, but as I've told a couple of the admirals and generals, "How about using your formidable power to get the troops OUT of war?" This whole involvement of the AVF in never-ending wars is kind of reminiscent of the old saw about the weather: Everybody talks about it, but nobody does anything about it. It's seem as if everbody that matters in the political sense has just kind of accepted constant war as the normal course of events. And Joe Sixpak goes right along with because of the terrorist boogeyman and the fact that few Americans have anything personally invested. Other than money, that is, but they don't seem to make that connection.

    Incidentally, one thing that's rarely mentioned by the advocates for increased military pay is the tax advantage. Guys in the D.C. area and California get maybe $2K a month housing. That's tax-free. So are rations.

    JP is also onto something, and it has everything to do with the end-strength active duty rolls. They're essentially bogus, just as soon as you start calling Guard units and reservists to extended active duty. Oh, and hey, throw all of those contractors in there as an AVF expense. It's now become clear that our vaunted AVF probably wouldn't even be able to roll out of the motor pool without contractor assistance.

    And finally, acquisition. Gates made a speech today. Told the Navy they gotta do better in controlling costs on ships. They now cost three times what they cost in the 80s. Then there's force structure. Gates cited 11 carrier groups. Nobody else has more than one. Why do we have 11? Ain't just the carrier, either, in these groups. Lots of pilot fish go along with the mamma ship. And then there is the whole issue of how, given the proliferation of great smart weapons, our dreadnoughts may be so vulnerable that they're becoming an anachronism.

    This is a broke system, folks. From personnel to acquisition to structure. It just reeks.

  11. Publius-

    "Pay Comparability" is only an issue if competing with the general workforce for recruits. That's what Vessey was getting at. In 1970, we didn't have to recruit based upon wages. One enlisted for a variety of reasons, one of which was simply to have a choice of the terms of one's service versus the random luck of the draft. No attempt was made to make E-1 through E-3 compensation suitable for a "family". Similarly, 2nd Lt pay was not on a par with equivalent civilian pay, but then, most 2LTs were draft influenced.

    So, if you look at pre-AVF initial entry pay (about $1,200/yr for an E-1 in 1966 or about $6,000/yr on 2006 Dollars) versus 2010 $17,000/yr (without the additional $18,000 in meals and quarters allowances), each brand new PVT is costing us $11,000/year more in constant, inflation adjusted $$$. Further, in 1966, E-1 through E-3 were not eligible for quarters nor housing allowance, so there's another $18,000 per married snuffy added to the above. And what are the most populous grades in todays' military?

    And, as a result of making the entry pay grades more "attractive" the higher pay grades have inflated as well. My 1966 SGT paycheck would be about $25,000 in 2006 Dollars, while a 2010 SGT receives $48,500.

    I am not going to raise the "unchecked spending" flag on this, as I see it as a fully predictable outgrowth of the AVF. A decision was made to effectively make personnel costs a product of external factors beyond the government's control. We have had to set wages, bonuses and recruiting costs based upon "market" factors, but even in a "down" labor market, all that can be reasonably reduced is the recruiting costs, as wages have been irretrievably bench marked. Where private sector firms can reduce entry level wages when there is a surplus of labor, or even renegotiate existing wage contracts downward, the military has no such option. All that can be done is "freeze" wages or reduce recruiting costs. Neither of which is significantly large enough to make a real impact.

  12. Al,

    I don't think anyone would argue that a conscription-based force is cheaper. After all, when service is involuntary or due to some amount of coercion from the threat of involuntary service, then one can set wages by fiat.

    But how much savings would that give us? The personnel budget for 2009, for example, was $150 billion. Of that, a bit over $100 billion is for the active force wages, housing, subsistence, incentives and all the other "pays" including employer-paid social security tax. Let's assume we could cut that in half by returning to a conscripted force. That's $50 billion a year in potential savings. That's a big number but it's small compared to the entire defense or federal budget and therefore would have minimal impact on sustainability.

    The point being, when/if the US debt/deficit crisis comes, we're going to face end-strength reductions because that's what will make a substantial impact on the budget. We'll also have to reduce our overseas commitments because it's very expensive to operate a global force. So, IMO, the question of sustainability really isn't about the AVF - it's much bigger than that and I think what will be required is wholesale reorganization on the scale of 1947, along with a fundamental change in national strategy. There's doesn't seem to be much support for that at present so, like many other things, I'm skeptical anything will change until we end up like Greece.

  13. Andy: The point being, when/if the US debt/deficit crisis comes, we're going to face end-strength reductions because that's what will make a substantial impact on the budget.

    The very point I was offering in the first place. The per capita payroll is a substantial part of the budget, and disproportionately more than it was 40 years ago. Yes, we are on a collision course with not being able to pay our bills, and the increased manpower costs of the AVF have probably hastened that.

    You don't need to defend the AVF with statements such as "when service is involuntary or due to some amount of coercion from the threat of involuntary service, then one can set wages by fiat." I was just pointing out that at least one person saw the collision coming some 40 years ago. Even as C-JCS, he couldn't do much about it. It's just the way we, through our elected critters, like to do business.

  14. Another thing to consider as you try to sustain an AVF, is that not all jobs are equal. One of the greatest challenges in my part of the Army is keeping talent from running to contractor jobs. An E6 mechanic, no offense, is not as lucrative as an E6 Intelligence linguist working in Special Ops. As a result, special skills get pro pays and bigger reenlistment bonuses. I will be the first to admit that the military pay is great money. Especially during war time when I could easily bank well over $100k a year tax free. But that type of compensation has to happen to keep young soldiers from fleeing to the dreamy contractor jobs who hound soldiers promising three times their paycheck and no uniforms, formations and no PCS every two years. I don't think lowering compensation is a realistic option, I agree with Andy and others that the solution to bring down the associated cost is to reduce the force. Later on, just for fun and perhaps some shock value, I will break out my LES, and add all the additional combat pays. Last year I paid $1,500 in total federal taxes, no state as a Texas resident, but I earned over $90k, not including some considerable TDY. (asPublius guessed, bringing it well over $100k net)

  15. bg-

    Lowering compensation is virtually impossible, especially with the "market" competition from contractors doing what was formerly soldier tasks. Pro-pay is nothing new, nor are re-enlistment bonuses, but they are current pay scale influenced - higher relative pay, higher relative costs of bonuses.

    We got ourselves into this situation, and all we can do now is cope with it. It's the price tag resulting from AVF coupled with "outsourcing" military jobs to a contractor. We actually created much of the "competition" that drives up the uniformed labor costs.

    It all falls under the category of "Be careful what you wish for". We are slowly approaching the point where we cannot afford to be a world power in military terms.

  16. Al,
    I find it interesting that there is still a bed rock belief that we are a world power.
    We just can't shake this illusion.
    I believe otherwise. When we have to discuss pay and benefits , this should prove my point.
    It's not the AVF that is unsustainable - it's the American way of life that will break our balls.

  17. It all falls under the category of "Be careful what you wish for". We are slowly approaching the point where we cannot afford to be a world power in military terms.

    Yes, but we're only talking about ~$50 billion dollars here - a considerable amount of money to be sure, but nothing that, by itself, threatens whether we can afford to be a world military power.

  18. jim-

    Perhaps what I was saying that even if we wanted to become a "world power" once again, the price tag is way out of our reach. I never even alleged we are still one.

  19. Jim,

    I think that's exactly right - we're not nearly as rich as we think we are.

  20. Andy
    Nor as powerful.
    We can destroy the world but we can't lead or understand it.
    We're good. I'm just preaching to the choir.
    My soapbox needed some use.

  21. Well, you know the uniforms are ready to take on the pay battle when this story is in my Saturday paper (front page!):

    Pentagon asking Congress to hold back on generous increases in troop pay

    Even UPI is getting in on this latest meme:
    Pentagon says troop pay overgenerous

    No doubt the generals and admirals are again looking at their toy budgets crumbling under Gates' "no top line increases" dictate and figure they will make hay while the sun shines on a decimated economy (meaning higher propensities to enlist, even higher willingness to re-enlist). It is the same old story, last seen during the early 1990s when the "peace dividend" (of very small top line shavings) helped balance, and then bring the fed budget into the black (while preserving many of those toys like CVNs, B2s, V-22s and FA-18s). And for our current class of flag officers, no one gets far by advocating actual savings, gaining victory or saving even one dime of taxpayer money.

    The real future ahead is severe slashing of budgets and commitments - if only to redirect some of that Fed $ to shoring up social relief services for a restive people. Sadly, without a "victory," I don't see any appetite to make the dual cuts - until they are forced on us by the banksters and foreign investors.

    (And if they really want to save some money, maybe the flags should propose to institute means testing upon military retirement pays. I mean really, does a guy like this:
    Richard Myers

    or these guys

    Peter Pace and Ed Giambastiani go corporate

    really need that $100K/yr in military retirement benefits? While young veterans go homeless or without care?

    Or while today's generals and admirals are desperate to buy that next fighter for a war we cannot afford to fight??)


  22. SP-

    Actually, it's Gates who is calling for curbs on personnel costs (as well as other expenses F-22 and FCS for example), not the generals.

    The point is, the military exists at the pleasure of the people. Since we began this "Long War", an increasing part of the bill for the military has been deferred to our grandchildren to pay, in order to make the burden less visible. If "The People" prefer their tax money be directed to "shoring up social relief services for a restive people", that is their Constitutional right. Are you arguing plain and simple facts (personnel costs are indeed rising significantly as a result of the AVF) or policy decisions?

  23. I'm arguing it is our policies that 1) require a larger than necessary armed forces, 2) a volunteer, professional (and therefore expensive) force, 3) refuse to pay for said forces with today's money (as you point out), and 4) that people should always come before things - esp if you want a professional, AVF. Do those people cost money. Yep. In fact, those costs should actually be a brake on adventurism. Has it turned out that way? I don't think so.

    What is the solution? Well, under Cheney and Rummy, contracting out force structure was a stopgap measure (that also personally enriched many). But mercenaries are even more expensive in the long run.

    The best solution is to critically re-evaluate our actual security needs, the costs of those needs and then match structure to requirements. A truly critical review would reduce our forces -- and costs today and tomorrow -- significantly.