The Cost of the Force

April 1, 2009

If you track the total DOD budget per active duty troop, excluding war costs, funding has grown by a bit more than two percent per year above inflation on average since the end of the Korean War (Figure 1). In some years, actual budgets were above the trend line, in other years, below it. In Fiscal 2009, the overall DOD base budget, not including war costs, is about eight percent above this historic trend line. …

Considering just the base defense budget, without including war-related funding, there has been a very large increase in defense spending over the past 10 years. In all, the DOD base budget has grown by 43 percent above inflation since it reached its lowest post-Cold War level in Fiscal 1998. That buildup is about the same as the increase at the end of the Carter and beginning of the Reagan Administrations—which was about 40 percent above inflation from Fiscal 1980 to Fiscal 1985.

“I want to focus on the … cost side—why things cost as much as they do.” So stated Stephen Daggett, specialist in defense policy and budgets with the Congressional Research Service.

Daggett was referring to the cost of providing national defense, which seemed to be growing more difficult to achieve even though Department of Defense expenditures have risen. Daggett offered his views on the subject at a Feb. 4 hearing of the House Budget Committee.

Figures 1 through 3 and text are contained in “The Sustainability of Current Defense Plans.” Daggett prepared Figure 4 at the request of this magazine. All figures are base budget only, excluding war-related funding. The effects of inflation have been factored out.

If you take all of this together, you come away with the impression that today’s defense budget appears, by most historical standards, to be quite robust. But listening to the military services, to defense industry, to defense budget analysts in the think tanks, you get a very different impression—that even now the budget is tight, and that if spending does not continue to climb, planners will face tougher and tougher choices. So why the disconnect? CRS’ analysis, quite bluntly, is that the budget seems tight because the cost of almost everything we have been doing in defense has been accelerating upward too fast even for growing budgets to keep up.

Source: CRS, based on Department of Defense data. FY2009 to FY2013 data reflect projections made in February 2008.

Notes: Excludes war costs and war-related end strength for FY1990 to FY1992 and for FY2001 and beyond.

And what is driving the cost of defense higher? In what follows, I will propose answers to that question, and I will mention each of them at least very briefly. Following that, I will very briefly discuss a couple of themes that emerge from this analysis of defense cost trends.

Cost of Personnel

The first factor driving up the price of defense is, simply, the growing cost of uniformed military personnel. If you take the amount provided for active duty military personnel in annual defense appropriations bills, exclude supplemental appropriations, adjust for inflation using the Consumer Price Index (CPI), and divide by the number of active duty troops, … you will find that an average military service member is about 45 percent more expensive … in Fiscal 2009 than in Fiscal 1998. This does not include the cost of medical care for service members, dependents, and recent retirees, which is financed in the operation and maintenance accounts, and which also has grown substantially. …

A long-term perspective on the price of military personnel is reflected in Figure 2, which shows the cost of an individual active duty service member indexed to the inception of the all-volunteer force in 1972. In brief, pay and benefits of military personnel declined in the 1970s because annual pay raises didn’t keep up with inflation; jumped up in Fiscal 1980 and Fiscal 1981 with catch up pay raises of 11.7 percent and then of 14.3 percent—that is, more than 25 percent over a two-year period; climbed very modestly in the remainder of the 1980s and ’90s; and then rocketed up dramatically beginning in about Fiscal 1999.

The main increases over the past 10 years include:

Congressionally mandated annual pay raises equal to the Employment Cost Index (ECI) plus one-half percent in seven of the last eight years. …

Three rounds of “pay table reform,” requested by the Defense Department, which provided additional pay raises, sometimes of as much as 10 percent, to middle grades. …

Source: CRS, based on Department of Defense data.

Notes: Excludes war costs and war-related end strength for FY1990 to FY1992 and for FY2001 and beyond. Adjusted forinflation using Consumer Price Index. ECI = Employment Cost Index. FY1972 = inception of the all-volunteer force.

Substantial increases over several years … in the nontaxable Basic Allowance for Housing (BAH), intended to eliminate differences in out-of-pocket on-base and off-base housing costs.

Those increases, along with changes in subsistence pay for officers, bonuses and special pays, and some other things, are reflected in higher take-home paychecks of military personnel. In addition, there have been very large increases in retirement benefits. …

The purpose of doing this analysis is not to address whether military pay and benefits are adequate or more than adequate or less than adequate. A discussion of that question is certainly important, but it goes way beyond the point I am making. The only purpose of this analysis is to address the issue of budget trade-offs. If only a given amount of money is available for defense, the growing cost of personnel necessarily comes at the expense of something else. …

Cost of O&M

A second cost driver is the continued, steady growth of operation and maintenance budgets. If you put together a spreadsheet that shows defense funding back to end of the Korean War, exclude recent war costs, divide annual O&M budgets by the number of active duty troops, and adjust for inflation, you will come up with a trend line that grows by somewhere between 2.5 percent and 3 percent above inflation every year—year after year after year (Figure 3).

It is a bit difficult to analyze why O&M grows at such a relentless, steady pace, because the O&M budget covers all kinds of very different activities. … There are, however, a few pieces of the picture that collectively explain in very large part why O&M costs keep climbing.

One is that a very large share of the O&M budget goes to pay civilian Department of Defense personnel. In the Fiscal 2009 base budget, civilian pay in the O&M accounts was projected to total $53 billion, about 30 percent of total O&M funding. While federal civilian pay and benefits have not grown as rapidly as those of uniformed personnel, they have outpaced the growth of inflation—as in most skilled occupations, compensation of federal civilian workers has grown in real terms over time.

Second, the O&M budget includes costs of operating and maintaining major weapon systems. Those costs also appear to have increased faster than base inflation, though the reasons are complicated. Military service officials, particularly in the Air Force, have long argued that aging equipment becomes progressively more and more expensive to operate and maintain. CBO found some time ago that this was not a major factor in O&M. On the other hand, though it may not add up in itself to a huge amount of money, it may be one of a large number of individually minor factors that should be considered in concert to explain the larger trend.

Source: CRS, based on Department of Defense data. FY2009 to FY2013 data reflect projections made in February 2008.

Notes: Excludes war costs and war-related end strength for FY1990 to FY1992 and for FY2001 and beyond.

Most observers also agree that new weapons are typically more expensive to operate and maintain than earlier generations of similar systems. Why this should be the case is very hard to explain. It is certainly at odds with trends in the civilian sector, in which reliability and maintainability of all kinds of goods have improved dramatically—consider automobiles, household appliances, and, especially, consumer electronics (leaving aside battery replacement). It appears, however, that while military developers promise lower operating costs, in the end they choose to pursue advances in performance instead.

Third, the O&M budget includes most of the annual funding for providing medical care to service members, their dependents, and many retirees. … DOD officials see growing medical costs, which have climbed much faster than overall inflation, as a critical long-term budget issue.

Fourth, and finally, the O&M budget finances operation and repair of military facilities. As the quality of life in the civilian sector improves, defense facilities also, in general, are expected to keep up, which, in turn, also may drive up costs in real terms. …

Most importantly, within limited budgets, higher O&M costs will crowd out other things. … Successive long-term defense plans generally assumed that O&M costs would level off in future years. When they did not, within limited budgets, the Defense Department shifted funds from procurement to cover must-pay O&M bills. Year after year, therefore, planned increases in procurement funding were deferred due to the growth in O&M accounts. …

Cost of Weapons

A third cost factor, and one that is a matter of extensive discussion today, is the apparently accelerating pace of intergenerational cost growth in major weapons programs (Figure 4). …

Examples of very large intergenerational leaps in weapons costs are all around. The F-35 fighter, which is the new “low-end” fighter for the Air Force, is now projected to have a unit flyaway cost of $83 million each and a total unit acquisition cost of over $100 million. In Fiscal 1985, the Defense Department procured 150 F-16s fighters, the previous low-end fighter, at a then-year price of $16 million apiece, which is about $30 million in Fiscal 2009 prices. In later years, F-16 prices climbed as new models incorporated more and more advanced technology. Still, the leap in costs is dramatic. …

The growing price of weapons does much to explain why the expense of maintaining even a smaller force structure than in the past has climbed so high. At current prices of major weapon systems, the “steady state” cost of replacing platforms as they reach the end of their planned service lives has become very difficult to afford, even with budgets that exceed previous peaks.

Source: CRS, based on Department of Defense data. FY2009 to FY2013 data reflect projections made in February 2008.

Notes: Excludes war costs and war-related end strength for FY1990 to FY1992 and for FY2001 and beyond. Acquisition = procurement + RDT&E.

Why this is the case—and what to do about—is a matter that is far beyond the scope of this brief survey. In some cases, at least, cost has been driven up by an attempt to build systems to perform multiple missions with maximum capabilities in every dimension. The DDG-1000, which I cite only because it has been a focus of debate for the past year, and may well be terminated, may be an informative example. … It is all things to all requirements writers. … It is now projected to cost between $3.5 and $4 billion each, and … cannot, therefore, be afforded in substantial numbers.