Tuesday, February 8, 2011

Deficit Reduction: Defense Spending Cuts

It is becoming clear that deficit reduction is necessary and urgent. One can argue about whether it should begin this year or next, but that does not really change the nature of the long term challenges that we face. It is also becoming recognized that the deficit is not just an economic problem, it is also a national security issue. That being the case, it is worthwhile to evaluate changes in our defense posture that can alleviate the economic issues while maintaining the needed military capability.

A number of such studies are beginning to appear. The Center for American Progress provides a study that suggests cuts in the Defense budget of 16% ($109B) by 2015 would sustain our military capability and contribute to deficit reduction.

We will focus on a report in “Foreign Affairs:” A Leaner and Meaner Defense by
GORDON ADAMS is a Professor in the U.S. Foreign Policy Program at the School of International Service at American University and a Distinguished Fellow at the Stimson Center. MATTHEW LEATHERMAN is a Research Associate for the Stimson Center's Budgeting for Foreign Affairs and Defense Program and a regular contributor to its blog, The Will and the Wallet.
The authors make the reasonable claim that the military cannot budget efficiently if it does not have a clear understanding of what its mission is going to be. Traditional Pentagon planning required resources to fight two conventional wars in two locations concurrently. That would obviously provide a rationalization for maintaining an enormous force. It is now hard to think of even one country we might go to war with, let alone two. Those who wish to propagate this mindset continue to point to the Chinese as a looming threat, but by treating China as a potential enemy, we only insure that China will have to build up a capability to match our perceived threat to them. The authors advise caution in treating China, and suggest we can hedge our military investment considerably without risk.

Their thesis is that the “war on terror” mentality and the Iraq and Afghanistan adventures have caused the military to lose focus on what their long-term mission really is. While Secretary Gates talks of eliminating programs and improving efficiency
“....Gates also argued last August that "the task before us is not to reduce the department's topline budget; rather, it is significantly to reduce its excess overhead costs and apply the savings to force structure and modernization." In other words, instead of contributing to a disciplined and well-planned reduction of the United States' debt, Gates wants to keep existing funds in the Pentagon and maintain both the military's current size and most of the Pentagon's planned investment programs. The FY 2011 budget, which is still pending before Congress, proposes to increase the defense budget, despite its already historic level, and Gates has widely advertised that he hopes to achieve one percent real growth in the defense budget in the years after FY 2011.”
This misguided quest for continued high levels of funds arises from a misconception.
“The most vexing missions are those at the heart of the Quadrennial Defense Review: counterinsurgency, nation building, and the building of other countries' security sectors, among others. And these, alongside competition with China, are motivating Gates and other planners at the Pentagon, despite Gates' acknowledgment in this magazine last spring that "the United States is unlikely to repeat a mission on the scale of those in Afghanistan or Iraq anytime soon -- that is, forced regime change followed by nation building under fire." Such planned missions are based on a misguided premise: that the U.S. campaigns in Afghanistan and Iraq foreshadow the need for a large U.S. military force to increasingly intervene in failing states teeming with insurgents and terrorists. But Gates' effort to nonetheless tailor U.S. military capabilities to such tasks suggests that there is still significant support for them in the Pentagon. According to General George Casey, the army chief of staff, for example, the United States is in an "era of persistent conflict." Yet the United States is very unlikely to embark on another regime-change and nation-building mission in the next decade -- nor should it. Indeed, in the wake of its operations in Afghanistan and Iraq, the demand for the United States to act as global policeman will decline.”
The authors suggest that the focus should be on dismantling al Qaeda, military cybersecurity, and maintaining forces necessary to wage a conventional war and to sustain a nuclear capability. The first two of these tasks do not require large numbers of additional personnel or massive new investments. The last mission is becoming ever more unlikely and the forces required should gradually be scaled down to represent that low probability.

Given this vantage point, the authors provide this overall assessment of the opportunities for reducing expenditures.
“The national defense budget accounts for 56 percent of all U.S. federal discretionary spending. Defense is now one of the country's "Big Four" accounts, consuming roughly the same share of federal spending as do each of Social Security, income-based entitlements (such as welfare), and the total nondefense discretionary budget. And the United States is expected to spend over $700 billion on national defense in 2011 -- twice as much as it spent in 2001, more in real dollars than for any year since the end of World War II, and as much as is spent by the rest of the world's militaries combined.”

“The Congressional Budget Office currently projects that between fiscal years (FY) 2012 and 2018, the U.S. government will spend over $5.54 trillion on defense. In addition to any reductions stemming from the United States' withdrawal from Afghanistan and Iraq, gradual cuts could lower the defense budget over those seven years by more than $788 billion, to about $4.75 trillion -- a reduction of more than 14 percent. This would involve reducing the active-duty force by 275,000 troops, to 1.21 million (yielding $166 billion in savings); cutting programs that are redundant, underperforming, or linked to low-priority missions ($354 billion in savings); restraining military compensation, health-care, and retirement costs ($148 billion in savings); and reforming the intelligence community ($120 billion in savings).”
The authors’ contentions regarding the manpower and acquisition cuts are not very controversial. However, the suggested savings from “reforming” the intelligence community is so large as to strain credulity. If they are correct, we have been wasting enormous amounts of money for years.
“According to James Clapper, the director of national intelligence, the intelligence budget for FY 2010 exceeded $80 billion. Size may now be the intelligence community's most significant problem.”

“Duplication in information technology, security procedures, human resource systems, and purchasing could be eliminated and overall management simplified. More savings still could be found by decreasing spending on government satellite imagery, which duplicates commercially available imagery, and by no longer vacuuming up more intelligence signals than are needed or can be processed. Helping the policymakers across the government who consume intelligence better communicate their needs to intelligence providers would also eliminate a sizable amount of unused analysis and the costs of generating it. Analysts with considerable internal management experience in the intelligence community think it reasonable to assume that such initiatives could save U.S. taxpayers $120 billion between FY 2012 and FY 2018.”
The surprising and, perhaps, controversial proposal involves military compensation. There are three issues at play here: pay level, health coverage, and retirement policy. Let’s start with military pay.
“The U.S. military's pay system has become increasingly disconnected from its primary purpose: developing a compensation system that produces the mix of personnel that can get the work done most effectively. By this standard, the key indicator of the adequacy of military pay is whether recruitment and retention targets are being met, particularly for tasks requiring critical skills. The Congressional Budget Office has determined that overall military pay, including cash and in-kind compensation, presently exceeds compensation for comparable work by civilians by at least 11 percent. This is the result of the Pentagon's long-standing tradition of maintaining morale by paying members of equal rank and grade roughly the same, irrespective of the demand for particular skills, as well as of Congress' routine practice of authorizing pay increases above those requested by the Pentagon.”

“A much more refined pay model is needed, one that replaces across-the-board pay raises with a more tailored approach that would allow supply and demand to generate the right combination of needed specialties and skills. This would involve much greater use of targeted bonuses and special pay for key required specializations or jobs, such as assignments to hazardous stations and language or technological skills. Importantly, current pay increases based on promotions or longevity would not be affected, nor would the special compensation given to combat troops for hazardous duties. Across-the-board pay increases should be suspended as military forces are reduced and reorganized according to the cuts suggested here. This adjustment could take two years or more, at which point the general pay increase question could be revisited. This could save roughly $40 billion between FY 2012 and FY 2018.”
The statement about the level on military pay is based on this CBO report, and this chart.

The level of military compensation for enlisted men was surprising. Apparently they are being paid above market level. It will be interesting to see if the most conservative of the legislators who would like to see a cut in wages for government workers would apply the same logic to the military. The notion of adjusting pay by value, rather than by strict classification, seems like a reasonable decision.

There appears to be a collective guilt over the way our stupid decisions have caused the abuse of our soldiers. The result is an attempt to expand benefits beyond what is fiscally sound or necessary in the opinion of the authors.
“Likewise, the Department of Defense's health-care system, TRICARE, badly needs discipline. Defense health-system costs have grown from $19 billion in FY 2001 to over $50 billion in FY 2010. The pool of eligible personnel has expanded since Congress created TRICARE in 1995: TRICARE Reserve Select was introduced for reservists and their dependents, and TRICARE for Life was added for Medicare-eligible retirees and their dependents.”

“There are two types of retirees in the TRICARE system: those who are eligible for Medicare and those who are not, typically because they remain in the work force and have not reached the age of eligibility for Medicare. TRICARE was founded with the expectation that beneficiaries who have not yet reached the age of eligibility for Medicare would pay approximately 27 percent of the overall cost of the program through enrollment fees and copays. But the premiums and the cost-sharing system have not changed since then. This has attracted a large number of military retirees still in the work force to TRICARE and away from alternative, civilian health-care plans. Now, only 11 percent of the program's costs are covered by beneficiaries not yet eligible for Medicare.”

“This must be corrected. Retirees who are eligible for Medicare and their dependents should share in the costs of TRICARE. For other retired beneficiaries, the enrollment fees and copays should be increased to 27 percent of costs, as was intended when the program was created. According to figures from the Congressional Budget Office, such changes could save $48 billion between FY 2012 and FY 2018.”
The proposed changes to the retirement system seem beneficial. It will be fairer for those who do not make the twenty-year mark, but those that do may be unhappy.
“Finally, the military's retirement program should be revised. It is an unfair system for those employees who leave the service before 20 years, the term after which they become eligible for the program. And it frustrates Pentagon managers, who could more easily encourage departures to match the military's personnel needs if a retirement option before 20 years of service were available. The system should be revised wholesale, using the civilian Federal Employees Retirement System as a model. FERS benefits become vested after five years, the program includes Social Security and a defined benefit plan, and employee contributions are matched by the employer. Eligibility for a full pension should be delayed until the retirement age set by Social Security, but a one-time lump-sum payment to ease the transition to civilian life should be provided to service members whenever they leave the service. Personnel who already have over 15 years of service at the time of the transition to the new system should be exempt from it. An analysis of similar proposals developed by the Department of Defense suggests that $60 billion could be saved between FY 2012 and FY 2018 from such a reform. Foregoing across-the-board military pay increases for two years, modernizing the TRICARE cost-sharing system for working military retirees, and reforming the military retirement savings plan could generate $148 billion in savings between FY 2012 and FY 2018.’
The authors’ schemes for cutting expenditures are probably conservative in the sense that there will still remain a military that is outsized and over-equipped for its mission. Politically, they are not conservative. Trying to push changes of this magnitude through the Houses of Congress will make for some interesting times for all.

The net result is that cuts of $100-150B per year from the Defense budget should be possible.

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