This is the accessible text file for GAO report number GAO-05-798 
entitled 'Military Personnel: DOD Needs to Improve the Transparency and 
Reassess the Reasonableness, Appropriateness, Affordability, and 
Sustainability of Its Military Compensation System' which was released 
on July 19, 2005. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Report to Congressional Committees: 

July 2005: 

Military Personnel: 

DOD Needs to Improve the Transparency and Reassess the Reasonableness, 
Appropriateness, Affordability, and Sustainability of Its Military 
Compensation System: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-798]: 

GAO Highlights: 

Highlights of GAO-05-798, a report to congressional committees: 

Why GAO Did This Study: 

Over the years, the Department of Defenseís (DOD) military compensation 
system has become an increasingly complex and piecemeal accretion of 
pays, allowances, benefits, and special tax preferences. DOD leaders 
have expressed concern that rising compensation costs may not be 
sustainable in the future and could crowd out other important 
investments needed to recapitalize equipment and infrastructure. Given 
the looming fiscal challenges facing the nation in the 21st century, 
GAO believes it is time for a baseline review of all federal programs 
to ensure that they are efficiently meeting their objectives. Under the 
Comptroller Generalís authority, GAO (1) assessed whether DODís 
approach to compensation provides adequate transparency over costs; (2) 
identified recent trends in active duty compensation, and how costs 
have been allocated to cash and benefits; and (3) reviewed how active 
duty servicemembers perceive their compensation and whether DOD has 
effectively explained the value of the military compensation package to 
its members. 

What GAO Found: 

DODís historical piecemeal approach to military compensation has 
resulted in a lack of transparency that creates an inability to (1) 
identify the total cost of military compensation to the U.S. government 
and (2) assess the allocation of total compensation investments to cash 
and benefits. No single source exists to show the total cost of 
military compensation, and tallying the full cost requires synthesizing 
about a dozen information sources from four federal departments and the 
Office of Management and Budget. Without adequate transparency, 
decision makers do not have a true picture of what it costs to 
compensate servicemembers. They also lack sufficient information to 
identify long-term trends, determine how best to allocate available 
resources to ensure the optimum return on compensation investments, and 
better assess the efficiency and effectiveness of DODís current 
compensation system in meeting recruiting and retention goals. To 
address this and other major business transformation challenges in a 
more strategic and integrated fashion, GAO recently recommended the 
creation of a chief management official at DOD. 

Transparency over military compensation is critical because costs to 
provide compensation are substantial and rising, with over half of the 
costs allocated to noncash and deferred benefits. In fiscal year 2004, 
it cost the federal government about $112,000, on average, to provide 
annual compensation to active duty enlisted and officer personnel. 
Adjusted for inflation, the total cost of providing active duty 
compensation increased about 29 percent from fiscal year 2000 to fiscal 
year 2004, from about $123 to $158 billion. During this time, health 
care was one of the major cost drivers, increasing 69 percent to about 
$23 billion in fiscal year 2004. In addition, military compensation is 
weighted more toward benefits compared with other government and 
private sector civilian compensation systems. Furthermore, less than 
one in five service members will serve 20 years of active duty service 
to become eligible for retirement benefits. Increasing compensation 
costs make the need to address the appropriateness and reasonableness 
of the compensation mix and the long-term affordability and 
sustainability of the system more urgent. 

DOD survey results and analysis of GAO focus groups and survey data 
have shown that servicemembers are dissatisfied and harbor 
misperceptions about their pay and benefits in part because DOD does 
not effectively educate them about the competitiveness of their total 
compensation packages. About 80 percent of the 400 servicemembers that 
GAO surveyed believed they would earn more as civilians; in contrast, a 
2002 study showed that servicemembers generally earn more cash 
compensation alone than 70 percent of like-educated civilians. 
Servicemembers also expressed confusion over aspects of their 
compensation, like retirement, and many complained that benefits were 
eroding despite recent efforts by Congress and DOD to enhance pay and 
benefits. By not systematically educating servicemembers about the 
value of their total compensation, DOD is essentially allowing a 
culture of dissatisfaction and misunderstanding to perpetuate. 

What GAO Recommends: 

GAO is making a number of recommendations to improve the transparency, 
reasonableness, appropriateness, affordability, and sustainability of 
the military compensation system. DOD generally concurred with GAOís 
recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-05-798. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Derek Stewart at (202) 
512-5559 or stewartd@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

DOD's Compensation System Lacks Transparency to Identify Total Costs 
and How Compensation Is Allocated: 

Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human 
Capital Goals or Not Sustainable in the Long Term: 

DOD's Lack of an Effective Communication and Education Effort on 
Compensation Has Allowed Servicemembers' Misperceptions and Concerns 
about Their Compensation to Perpetuate: 

Conclusions: 

Recommendations for Executive Action: 

Matter for Congressional Consideration: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Sample of a Personal Statement of Military Compensation: 

Appendix III: Comments from the Department of Defense: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Total Costs to Provide Active Duty Servicemembers Compensation 
(Source and Types): 

Table 2: Summary of Changes in Compensation Costs, Fiscal Years 2000 
and 2004: 

Table 3: Composition of Focus Groups: 

Figures: 

Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal Years 
2000-2004: 

Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation 
Costs per Active Duty Servicemember in Fiscal Year 2004: 

Figure 3: 2003 Mix Salary/Wages and Benefits in Civilian Compensation: 

Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 20-
Year Career: 

Figure 5: Reasons for Servicemembers' Dissatisfaction with Pay and 
Benefits: 

Abbreviations: 

DHP: Defense Health Program: 

DOD: Department of Defense: 

MEPS: Medical Expenditures Panel Survey: 

VA: Department of Veterans Affairs: 

Letter July 19, 2005: 

Congressional Committees: 

The military compensation system has had the same basic structure since 
the end of World War II, but over time, it has become a complex and 
piecemeal culmination and accretion of pay, benefits, and special tax 
preferences--each designed to meet a specific need in managing an 
evolving force. Today, the total military compensation package includes 
dozens of pays and allowances; several noncash benefits to take care of 
troops who, increasingly, are married with children; certain 
preferences; as well as lifetime retirement pay and health care for 
retirees and their families. Valuing military service is complicated. 
Serving in the military offers personal and professional rewards but 
also requires many sacrifices--frequent moves and jobs that are arduous 
and sometimes dangerous. Moreover, military culture is paternalistic, 
and servicemembers expect the United States to take care of them and 
their families as reward for their service. Since the late 1990s, the 
Department of Defense (DOD) and Congress have sought to improve 
military pay to make it more competitive. Congress has improved 
benefits by repealing the unpopular REDUX retirement system in 1999 and 
expanding health coverage to cover retirees and their families for life 
in 2002, among other enhancements.[Footnote 1] Even with these efforts, 
however, reports of dissatisfaction with some pays and benefits among 
military members still abound, and public perceptions linger that 
enlisted military members and their families are living in poverty. 

In recent years, Congress has taken steps to fund enhanced compensation 
and benefit programs for active duty and reserve personnel at a time 
when many military personnel are spending months or years away from 
home, often in harm's way, as the nation is heavily engaged in the war 
on terrorism. Moreover, as of 2005 DOD's budget had grown to nearly 
half a trillion dollars, including supplemental funding to support 
activities related to fighting terrorism. In our recent report on the 
challenges facing the United States in the 21st century, we expressed 
concerns about whether the current trends are both affordable and 
sustainable.[Footnote 2] Many federal programs--such as military 
compensation--were designed decades ago to address earlier challenges 
related to labor markets, security conditions, organizational 
structures, and compensation strategies of prior eras. Some DOD leaders 
have expressed similar concerns, specifically that the increasingly 
expensive compensation system could crowd out other important 
investments needed to recapitalize aging defense-related equipment and 
infrastructure. Moreover, DOD leaders are particularly concerned about 
the growth in compensation entitlements--such as health care and 
concurrent receipts for disability and retirement--that do not have a 
significant impact on recruiting and retention. In 2005, the 
compensation debate was reopened when mounting concerns within the 
department about the growth in compensation cost--and the limited 
management flexibility afforded by the current system--led the 
Secretary of Defense to form a committee to comprehensively assess the 
approach the department uses to compensate its personnel. 

Given the nation's increasing fiscal imbalance, we believe it is time 
for a baseline review of all major federal programs and polices, 
including military compensation, to ensure that they are efficiently 
and effectively meeting their objectives and well adapted to 21st 
century realities. We recognize that this will not be a simple or easy 
process and careful consideration must be given to any compensation 
changes because the stakes are high. We are convinced, however, that 
this reexamination offers compelling opportunities to both redress our 
current and projected fiscal imbalance while better positioning 
government to meet the new challenges and changing expectations of the 
21st century. 

In light of the above and under the statutory authority of the 
Comptroller General, we (1) assessed whether DOD's current approach to 
military compensation provides adequate transparency over total costs 
to the federal government; (2) identified the recent trends in active 
duty military compensation costs, and how compensation has been 
allocated to cash and benefits; and (3) reviewed how active duty 
servicemembers perceive their compensation and whether DOD has 
effectively explained the value of the military compensation package to 
its members. 

In conducting this review, we limited our scope to the compensation 
system for active duty military personnel. Numerous methods were used 
to gather and assess information for this work. We reviewed 
congressional justification budget books for DOD as well as the 
Department of Veterans Affairs (VA). We calculated the federal tax 
expenditure and accrual cost of some programs, such as those run by the 
VA. We conducted 40 focus groups with over 400 servicemembers across 
all four services and enlisted and officer pay grades at eight military 
installations in the continental United States. While the information 
from the focus groups is not generalizable to the entire DOD population 
of active duty servicemembers, it provides valuable context as to 
servicemembers' perceptions about their compensation and augments DOD 
survey findings. We reviewed DOD's Status of Forces survey data on 
satisfaction with compensation. The 2002 survey administered to over 
30,000 servicemembers had a response rate of 32 percent. DOD has 
conducted and reported on research to assess the impact of nonresponse 
rate on overall estimates. It found that, among other characteristics, 
junior enlisted personnel (in pay grades E1 to E4), servicemembers who 
do not have a college degree, and members in services other than the 
Air Force were more likely to be nonrespondents. We have no reason to 
believe that potential nonresponse bias not otherwise accounted for by 
DOD's research is substantial for the variables we studied in this 
report. Therefore, we concluded the data to be sufficiently reliable 
for the purposes of this report. See appendix I for more detailed 
information on our scope and methodology. We conducted our review from 
August 2004 through May 2005 in accordance with generally accepted 
government auditing standards. 

Results in Brief: 

The piecemeal approach to military compensation has resulted in a lack 
of transparency that creates two interrelated problems for decision 
makers. Specifically, this approach creates an inability to (1) 
identify the government's total costs to provide compensation to active 
duty servicemembers and (2) assess how compensation investments are 
allocated to cash, benefits, and deferred compensation. No single 
source exists to show the total cost of military compensation, and 
tallying the full cost required us to synthesize information from 
several different portions of the federal budget. In a typical civilian 
firm, managers know the costs of compensation among other costs, such 
as capital and technology, in order to make decisions on the most 
efficient and effective use of resources. Furthermore, federal 
accounting standards are aimed at providing relevant and reliable cost 
information to assist Congress and executives in making decisions about 
allocating federal resources. Therefore, we believe it is good business 
practice for decision makers to establish a foundation that provides 
them transparency over total compensation costs including the long-term 
cost and implications of current decisions. Without transparency, DOD 
and Congress do not have adequate visibility over a basic foundation of 
what it is truly costing the government to compensate servicemembers. 
Furthermore, they lack sufficient information to (1) identify long-term 
trends in costs, (2) determine how to best allocate resources to ensure 
the optimum return on compensation investments, and (3) assess the 
efficiency of the current compensation system on DOD's ability to meet 
recruiting and retention goals. This lack of transparency over the 
total military compensation costs is another indication that DOD needs 
a Chief Management Official (CMO)--a recommendation we recently 
proposed to address a range of business transformation challenges in a 
more strategic and integrated fashion.[Footnote 3]

The federal government's total costs to provide military compensation 
are substantial and rising, and 51 percent of the total compensation 
costs are allocated to noncash and deferred benefits. In fiscal year 
2004, the federal government's total annual cost to provide military 
compensation was about, on average, $112,000 per active duty 
servicemember (including enlisted and officer personnel) when 
compensation costs for cash, noncash, and deferred benefits are 
considered.[Footnote 4] Adjusted for inflation, total cost of 
compensation increased from about $123 billion in fiscal year 2000 to 
$158 billion in fiscal year 2004--about 29 percent. The main drivers in 
the growth of total compensation costs from fiscal years 2000 through 
2004 included: (1) basic pay (from $38.4 to $47.4 billion, about 23 
percent); (2) allowances for private housing (from $7.3 to $12 billion, 
more than 66 percent); and (3) health care benefits for current 
servicemembers, retirees, and dependents (from $13.8 to $23.3 billion, 
about 69 percent). Continued significant future increases in these 
costs, particularly health care, raise questions about the long-term 
affordability and sustainability of the system. For example, the 
Congressional Budget Office estimated that DOD could spend as much as 
$52 billion annually on health care by 2020.[Footnote 5] Furthermore, 
the mix of compensation for servicemembers is weighted toward noncash 
and deferred compensation, with these types of compensation accounting 
for slightly over half of annual compensation costs in fiscal year 
2004. This mix in compensation stands in contrast to private sector and 
federal civilian workforces, which typically receive one-third or less 
of their compensation in the form of benefits and deferred 
compensation. Furthermore, deferred compensation, like retirement pay, 
represents about a third of total military compensation costs, but less 
than one in five servicemembers will serve a full career and become 
eligible for active duty retirement pay and benefits. Given the rapid 
rise of compensation costs and the significant emphasis on noncash and 
deferred compensation, it is unlikely that DOD's current approach to 
compensation is reasonable, appropriate, affordable, and sustainable 
over the long term. 

According to recent DOD survey results, which were supported by our 
focus group analysis, some servicemembers are dissatisfied, and in some 
cases, harbor misperceptions about their pay and benefits in part 
because DOD does not effectively inform them about the competitiveness 
of their total compensation packages. It is industry best practice for 
employers to educate employees about the value of their compensation in 
terms of the pay and benefits they receive. We believe it is also 
important to inform employees on how their total compensation compares 
with the employment market. DOD's efforts to communicate pay and 
benefit information to servicemembers--mainly through Internet Web 
sites and distribution of annual earnings statements--have not 
positively influenced servicemembers' perceptions. Repeated DOD-wide 
surveys have consistently found that a high proportion--almost half of 
servicemembers in some cases--are dissatisfied with aspects of their 
compensation from basic pay to allowances for subsistence and housing. 
Furthermore, DOD officials acknowledge that servicemembers harbor 
misperceptions about their compensation. Our focus group findings, 
though not generalizable, corroborated these perceptions and revealed 
that servicemembers often misunderstood their compensation and harbored 
concerns about it. When we compiled the data from the survey 
administered during our focus group sessions, we found that about 9 in 
10 participants underestimated the cost of their compensation packages, 
and 80 percent believed they would make more in a civilian job. 
However, a recent DOD-sponsored study showed that, on average, military 
cash compensation alone--not including benefits--was at the 70th 
percentile of like-educated civilians.[Footnote 6] Servicemembers 
participating in our focus groups also expressed confusion over certain 
aspects of their compensation, such as how their retirement system 
worked. We heard frequent complaints from senior enlisted 
servicemembers and officers that benefits were eroding, despite recent 
efforts to enhance benefits. This perception, as mentioned before, is 
in direct contrast to the reality that costs to compensate 
servicemembers have risen dramatically in recent years and benefits 
costs are projected to rise even more dramatically in the future. By 
not systematically informing servicemembers about the value of their 
total compensation, DOD is essentially allowing a culture of 
dissatisfaction and misunderstanding to perpetuate even though the 
department and Congress have made significant efforts in recent years 
to increase military compensation. 

We are making recommendations that should improve the transparency, 
reasonableness, and appropriateness of the military compensation 
system. In commenting on a draft of this report, DOD generally 
concurred with our recommendations. 

Background: 

DOD is one of the nation's largest employers--employing approximately 
1.4 million active duty military personnel and 1.2 million reservists. 
In addition, 2 million retirees receive pay and benefits from the 
department. DOD is also the largest employer and trainer of young 
adults in the United States, recruiting about 200,000 individuals into 
active duty in 2004--the majority of them recent high school graduates. 
Although DOD competes with academia and other employers for these 
qualified people, the military's distinctive culture and job experience 
are unique from any other government or private sector employer. To 
maintain national security, DOD must meet its human capital needs by 
recruiting, retaining, and motivating sufficient numbers of qualified 
people. 

The Office of the Secretary of Defense, Personnel and Readiness is 
principally responsible for establishing active duty compensation 
policy. However, reservists fall under the active duty compensation 
policy if they have been mobilized for active duty. The department also 
sponsors regular studies on military compensation called the 
Quadrennial Review of Military Compensation--most recently completed in 
2002--that typically focus on specific issues like flexibility in 
compensation. In 2005, the Secretary of Defense formed a committee to 
study military pay in order to seek ways to maintain a cost-effective, 
ready force. Although the structure of the military compensation system 
has been largely unchanged since the end of World War II, with the 
advent of the all-volunteer force in 1973, the system has been enhanced 
by adding various pays, benefits, and tax preferences over time. 
Currently, the system is a complex mix of pays, benefits, and tax 
preferences--about a third of which are deferred until after the 
completion of active duty service. 

In the 1970s, DOD and Congress adopted the concept of "regular military 
compensation"--which is defined as the sum of basic pay, allowances for 
housing and subsistence, and the federal tax advantage[Footnote 7]--to 
describe the foundation of servicemembers' cash compensation which can 
be used to compare military and civilian pay.[Footnote 8] Basic pay-- 
which is predicated on rank and tenure of service--is the largest 
component of regular military compensation. In addition to regular 
military compensation, there are over 60 authorized special and 
incentive pays--generally offered as incentives to undertake or 
continue service in a particular specialty or type of duty assignment-
-as well as the combat zone tax exclusion, which generally makes income 
earned while serving in a combat zone nontaxable.[Footnote 9] 
Furthermore, DOD offers a wide range of benefits, many of which are 
directed at members with family obligations. DOD believes benefits are 
central to morale and readiness as well as important in providing 
members with a quality of life to help cope with the sacrifices they 
make. 

DOD's Compensation System Lacks Transparency to Identify Total Costs 
and How Compensation Is Allocated: 

Decision makers in Congress and at DOD do not have adequate 
transparency over total costs for providing military compensation to 
active duty servicemembers in terms of how compensation is allocated in 
the near term, if compensation investments are cost effective in 
meeting recruiting and retention goals, how much changes to 
compensation will cost in the long term, and whether compensation costs 
are affordable and sustainable in the future. Lack of transparency over 
costs is in part due to the sheer number of pays and benefits that make 
up the military compensation system and to the lack of a single source 
to show total cost of compensation. Moreover, the lack of principles to 
guide military compensation policy is a long-standing problem for DOD. 

Cost of Compensation Is Scattered Across Many Budgets: 

A total cost to compensate servicemembers does not exist in a single 
source for decision makers to view, and transparency is further 
hindered by the sheer number and types of pays, benefits, and tax 
preferences in the military compensation system. Good business practice 
requires adequate transparency over investments of resources, 
especially in times of fiscal balance constraint. In a typical civilian 
firm, managers would know the costs of compensation among other 
investments, such as capital and technology, in order to make decisions 
on the most efficient use of resources because decision makers have to 
consider both the obvious and implicit costs of their actions. 
Furthermore, federal accounting standards are aimed at providing 
relevant and reliable cost information to assist Congress and 
executives in making decisions about allocating federal 
resources.[Footnote 10] Therefore, we believe it is good business 
practice for decision makers to establish transparency over total 
compensation costs, including the long-term cost implications of 
current decisions. 

Because of the lack of a single source of compensation costs and the 
number and types of pays and benefits that combine to make up the 
compensation system, we had to gather information from multiple sources 
to compile our estimate of the total costs to provide military 
compensation. Funding for the numerous components of compensation 
resides in different budgets (see table 1). For example, the funding 
for cash compensation that servicemembers receive today, such as basic 
pay and housing allowance, are in DOD's military personnel budget. 
Despite its name, this title does not include all of the funding 
provided for military compensation and benefits. Funding for noncash 
benefits, such as health care and education assistance, is displayed 
partially in the department's Operation and Maintenance budget as well 
as in the VA's budget. And, deferred benefits like retirees' health 
care, which represent a significant portion of the costs of 
compensation, have long-term cost associations and are not adequately 
visible. Funding for military retirement is budgeted for on an accrual 
basis in the military personnel budget, as is health care for retirees 
over 65 years of age and their dependents.[Footnote 11] However, health 
care funding for retirees less than 65 years of age and their 
dependents is appropriated annually in the Operation and Maintenance 
budget as part of the Defense Health Program. In addition to DOD's 
deferred benefits, some servicemembers are eligible for veteran's 
benefits after they leave the military. These benefits, such as health 
care, pensions, and other compensations, are funded annually through 
the VA's budget. Furthermore, the lost federal tax revenue--the federal 
tax benefit servicemembers' receive because part of their cash 
compensation is nontaxable--is not displayed in a DOD budget exhibit 
for decision makers to consider when assessing new proposals or changes 
to the compensation system. This amount is significant: we estimate 
that it totaled about $6.4 billion in fiscal year 2004. Furthermore, we 
should note that our calculations underestimate the impact of 
compensation costs to the federal government annually, because we did 
not include significant outlays for the unfunded liabilities for 
current retirees' pay and health care benefits that are in the 
Department of the Treasury's annual budget, which totaled $34.4 billion 
in fiscal year 2004. These unfunded liabilities are being paid out of 
current appropriations, because the government has not always set aside 
monies for future liabilities. In fact, the government did not start 
setting aside monies for retirement pay until fiscal year 1985 or for 
health care benefits for retirees until 2003. 

Table 1: Total Costs to Provide Active Duty Servicemembers Compensation 
(Source and Types): 

Federal department's budget and type of budget: DOD Military Personnel; 
* Contains all cash compensation received by servicemembers in their 
"pay check" while serving on active duty and some costs for benefits; 
Component of compensation: Cash components: 
* basic pay; 
* allowances for housing and subsistence; 
* special and incentive pays; 
* other allowances; Benefits: 
* retirement pay accrual; 
* health care accrual for retirees over 65 years of age; 
* survivor benefits; 
* death gratuities; 
* other[A]. 

Federal department's budget and type of budget: DOD Operations and 
Maintenance; 
* Contains a number of benefits available to active duty servicemembers 
and their dependents in various subcomponents, such as the Defense 
Health Program, Defense Commissary Agency, Department of Defense 
Education Activity, and the Morale, Welfare, and Recreation exhibit (OP-
34); 
Component of compensation: 
* DOD dependent schools (on-base schools); 
* morale, welfare, and recreation programs (i.e., child care and 
exchanges); 
* commissaries; 
* health care for active duty servicemembers and their dependents; 
* education benefits. 

Federal department's budget and type of budget: DOD Future Years 
Defense Program (FYDP); 
* A planning document published by DOD;
 
* Contains costs for upkeep and utilities costs for on-base family 
housing; 
Component of compensation: 
* family housing upkeep and utilities; 
* we were unable to identify similar costs for barracks (on- base 
housing for single servicemembers). 

Federal department's budget and type of budget: Department of Veterans' 
Affairs Budget; 
* Although the VA's primary customers are retired or honorably 
discharged servicemembers, current active duty members are eligible for 
these education and home loan benefits.[B]; 
Component of compensation: 
* Montgomery GI Bill (education benefit); 
* Guaranteed Home Loan program. 

Federal department's budget and type of budget: Department of 
Education; 
* Funds provided to local school districts to offset the impact of lost 
tax revenue because of military installations; 
Component of compensation: 
* funding for local school systems impacted by military dependents. 

Federal department's budget and type of budget: Department of Labor; 
* Program for servicemembers who are leaving the active duty force and 
seeking civilian employment; 
Component of compensation: 
* employment assistance. 

Federal department's budget and type of budget: Other costs; 
* Certain costs are not available in any budget. We estimated those 
costs using various methods: 
* The Office of Management and Budget provided an unofficial estimate 
of accrual costs for current active duty members' future veterans' 
benefits; 
* DOD's Office of the Actuary provided accrual cost estimates for 
health care benefits for retirees and their dependents; 
* We calculated lost federal tax revenue estimates based on information 
from DOD and the federal tax code; 
Component of compensation: 
* compensation and benefits for retirees and honorably discharged 
servicemembers; 
* health care benefits for retirees under 65 and their dependents; 
* federal tax expenditure resulting from special nontaxable allowances. 

Source: GAO analysis. 

Note: For more detailed information, see app. I. 

[A] Other includes education benefits, savings deposit program, 
adoption expenses, subsistence in kind, separation pay, partial 
dislocation allowance, transportation subsidy, permanent change of 
station, social security tax, unemployment benefits, and 
servicemembers' group life insurance hazard payments. 

[B] Upon joining active duty, servicemembers are enrolled in the 
Montgomery G.I. Bill unless they opt out of the program. In fiscal year 
2005, a participating servicemember paid $1,200 into the program and, 
if enrolled as full-time students at an approved educational 
institution, a servicemember received as much as $12,000 annually. 

[End of table]

Since the costs of compensation are scattered across the federal 
budget, no one organization has visibility over the total costs of 
military compensation. The lack of transparency over total costs to 
compensate servicemembers impacts decision makers' ability to manage 
the system, including (1) assessing the long-term cost implications, 
(2) determining how best to allocate resources to ensure an optimum 
return on investment, and (3) assessing the efficiency of the current 
compensation system on DOD's ability to meet recruiting and retention 
goals. As a result, the current compensation system is made up of a 
number of benefits and over 60 different pays and allowances that have 
been added piecemeal over the years to address specific needs. The main 
problem with this piecemeal approach is that it does not consider the 
system as a whole--and, as a result, new initiatives are considered in 
isolation and often with little consideration to how these will 
contribute to the ability of the military compensation system to 
efficiently meet recruiting and retention goals and if resources are 
being allocated to ensure the optimum return on compensation 
investments within current and expected resource levels. For example, 
in 2000 Congress enhanced retirement benefits to include health care 
for retirees over 65 years old and their dependents.[Footnote 12] This 
additional benefit came at significant costs, about $6.5 billion 
accrual funding in fiscal year 2004 alone, and with little evidence of 
whether, and if so how it contributes to the efficiency and 
effectiveness of the compensation system in terms of recruiting and 
retention. 

Lack of Principles to Guide Military Compensation Policy Is a Long- 
standing Problem: 

Challenges associated with piecemeal changes and adjustments to the 
military compensation system have been a long-standing problem with the 
system. In 1979, we evaluated DOD's compensation system and concluded 
that piecemeal adjustments and a lack of overall guiding principles of 
compensation were a problem in establishing a basis for evaluating 
changes to the total compensation system.[Footnote 13] As a result, we 
recommended that Congress establish a permanent, independent military 
compensation board to identify and recommend pay principles, see that 
pay principles are appropriately implemented, and continuously monitor 
and make recommendations for changing the military compensation system 
consistent with the established principles. At the time, DOD officials 
believed that military pay increases should be linked to federal 
civilian pay increases--and that special and incentive pays could be 
used to alleviate critical skill shortages. Officials disagreed that a 
board should be established, indicating that it would be 
counterproductive to create a "headless fourth branch" of government. 
However, the underlying problems we pointed out in 1979--lack of 
explicit compensation principles and the difficulty in making major 
changes to compensation--still exist today. The Military Compensation 
Background Papers describe six principles that the compensation system 
is designed to achieve; those principles are: managing manpower, 
compatibility with the level of technology servicemembers employ, 
equity, effectiveness in war and peace, flexibility, and 
motivation.[Footnote 14] However, some 25 years later, these principles 
do not provide clear policy and doctrine to guide military compensation 
policy as described in this excerpt from DOD's Military Compensation 
Background Papers: 

"the relationships between the individual components of compensation 
and their systemic interrelationships as a coherent structure remain 
largely implicit rather than explicit. Virtually every aspect of 
military activity has explicit doctrines, principles, and practices 
embodied in field manuals, technical manuals, and various joint 
publications. Military compensation is noteworthy in its lack of such 
an explicit intellectual foundation."

Furthermore, the Secretary of Defense tacitly admitted the difficulty 
in changing military compensation from inside the department when he 
formed an independent advisory committee to study compensation in 2005. 
Of particular concern to the department was the growth in entitlement 
spending for things like health care and the appropriateness of the mix 
of in-service and post-service compensation. However, Congress has 
taken certain measures to enhance post-service compensation or benefits 
that DOD has not requested or in some cases has discouraged, such as 
the expansion of concurrent receipts for retirees with disabilities. At 
the time of this report, the Secretary of Defense's committee was just 
beginning its work; however, the Secretary had requested the committee 
provide an interim report by September 2005 and conclude its work by 
spring 2006. 

In order to achieve lasting and comprehensive change, organizations 
need sustained top leadership to help make significant and systematic 
changes become a reality and sustain them over time. We have recently 
recognized and suggested that to achieve such leadership a Chief 
Management Official with responsibility for DOD's overall business 
transformation efforts should be created.[Footnote 15] We believe the 
long-standing lack of explicit principles and the difficulty in 
changing military compensation from inside DOD is another example of 
how a Chief Management Official could be beneficial to DOD. 

Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human 
Capital Goals or Not Sustainable in the Long Term: 

The federal government's total costs to compensate its active duty 
servicemembers have increased significantly in the past 5 years, and 
given that costs are heavily weighted toward noncash and deferred 
benefits, the structure of the current compensation system raises 
questions about the reasonableness, appropriateness, and long-term 
affordability and sustainability of DOD's approach to compensating its 
military workforce. Between fiscal years 2000 and 2004, overall 
compensation costs increased from $123 billion to $158 billion--or 
about 29 percent, in 2004 dollars. Increases in costs were primarily 
driven by basic pay, allowances for housing, and health care benefits. 
Furthermore, over half of the mix of compensation costs is in the form 
of noncash and deferred benefits, which stands in contrast to private 
sector and federal civilian organizations that tend to rely more 
heavily on cash pay, and less on benefits. Military analysts have noted 
that benefits, especially deferred benefits like retirement, are a 
relatively inefficient way to influence recruiting and retention, 
compared to cash pay. 

Compensation Costs Have Significantly Increased: 

The total cost to the government to provide compensation for active 
duty members has grown about 29 percent, adjusted for inflation, 
between fiscal years 2000 and 2004, as shown in figure 1. Over this 
same time period, the number of active duty troops remained relatively 
constant at about 1.4 million people, but military compensation costs 
grew from $123 billion to $158 billion in fiscal year 2004 dollars 
annually.[Footnote 16] We estimate that the average cost of 
compensation per servicemember (i.e., both enlisted personnel and 
officers) in 2004 was about $112,000. Three things are important to 
understand about our estimate. First, it is an average of what it cost 
the government to compensate servicemembers, not what the 
servicemembers "receive in their paycheck." Individual cash 
compensation will vary significantly based on rank and other factors. 
Furthermore, the value of benefits also varies significantly depending 
on individual circumstances. Second, because agencies other than DOD 
provide compensation to servicemembers, our estimate includes costs 
appropriated to The Department of Veterans Affairs, the Department of 
Education, and the Department of Labor as well as the lost tax revenue 
as a result of special tax advantages received by military personnel 
among others.[Footnote 17] Third, it does not represent the marginal 
cost of adding servicemembers, because it does not include significant 
costs for acquiring and training military personnel. Such costs are 
substantial: DOD officials told us that the cost for training can be as 
much as $36,000 per person if a broad range of training costs are 
included. 

Recently, other defense analysts have made attempts to estimate the 
cost of compensation. While these estimates vary based on what costs 
are included in their analyses, the trends are the same. For example, 
the Congressional Budget Office (CBO) estimated that in 2002 
compensation cost about $99,000 per active duty servicemember. DOD's 
Office of Program Analysis and Evaluations calculated all military 
compensation costs to be approximately $117,000 per servicemember in 
fiscal year 2004. Other DOD officials have done similar work which 
included compensation costs; for example, officials in the Office of 
Secretary of Defense told us they recently estimated DOD's cost to add 
an additional servicemember at about $109,000 per servicemember. Navy 
officials have done detailed work to estimate the cost of manpower to 
the Navy, and concluded that for example, the standard programming rate 
for officers in pay grade O4 was about $126,000 and about $79,000 for 
enlisted personnel in pay grade E-7; however, these costs do not 
include health care accrual costs for retirees. 

Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal Years 
2000-2004: 

[See PDF for image]

Note: Our per capita costs are based on active duty end strength. 
According to DOD officials, since fiscal year 2002 over 100,000 
mobilized reservists were paid out of the active duty compensation 
budget. If you considered these personnel, the average costs to provide 
compensation would be about $5,000 lower. 

[End of figure]

Military Compensation Components Driving Total Cost: 

Growth in military compensation is attributed, primarily, to increases 
in (1) basic pay, (2) allowances for housing, and (3) health care cost. 

* Basic pay, found in the military personnel budget, increased from 
$38.4 billion to $47.4 billion from fiscal years 2000 to 2004--an 
increase of about 23 percent--and is the largest component of the 
compensation system.[Footnote 18] DOD has asked for and Congress has 
supported sizable across-the-board raises in basic pay in order to 
address concerns that military members may be underpaid compared to 
comparable educated civilian counterparts. From fiscal years 2000 to 
2004 the average pay increases to servicemembers exceeded average wage 
increases for all private sector employees. 

* Allowances for housing, found in the military personnel budget, 
increased by about 66 percent from $7.3 billion to $12 billion between 
fiscal years 2000 to 2004. Prior to fiscal year 2001, DOD's policy was 
for members to pay for 15 percent of their housing costs out of pocket; 
however, in fiscal year 2000, DOD introduced the "zero out of pocket" 
initiative that increased servicemembers' housing allowances to 
eliminate their out-of-pocket expenses by fiscal year 2005.[Footnote 
19] This effort was to encourage servicemembers to live off-base and is 
consistent with DOD's policy that states it is the department's 
preference for servicemembers to live in civilian housing. 

* Health care costs, including the costs for active duty servicemembers 
and their dependents as well as accrual costs for retirees and their 
dependents, increased from about $13.8 billion to $23.3 billion between 
fiscal years 2000 and 2004, an increase of about 69 percent. This 
increase is attributable, in part, to the fiscal year 2002 expansion of 
health care benefits to retirees over 65 years of age to cover them and 
their dependents for life.[Footnote 20] DOD raised concerns about 
expanding entitlements, such as health care, that do not provide them 
leverage over readiness. Also contributing is the higher-than-average 
increase in costs of medical care. A 2003 study by CBO projected that 
if DOD's medical spending increases at the same rate as per capita 
medical spending in the United States, as a whole, it could increase to 
possibly as much as $52 billion, or $38,000 per servicemember in 2002 
dollars, by 2020.[Footnote 21] These costs include (1) current 
appropriations from the operations and maintenance, defense health 
program budget, for current servicemembers and their dependents; and 
(2) estimated accrual costs for retirees and their dependents from the 
DOD actuary.[Footnote 22] Given CBO's projections of substantial growth 
in future costs and the 69 percent increase over the past 4 years, 
serious questions about the affordability and sustainability of the 
current compensation system arise. 

Officials within the department told us that they sought increases in 
basic pay and housing allowances because they think investments in 
these types of compensation are more efficient in meeting the 
department's recruiting and retention goals. Furthermore, continued, 
significant increases in these areas--especially health care costs, 
which could exceed $50 billion annually by 2020--raise questions about 
the long-term affordability and sustainability of the current 
compensation approach. The summary of military compensation components 
displayed in table 2 shows the percentage changes in costs between 
fiscal years 2000 and 2004. 

Table 2: Summary of Changes in Compensation Costs, Fiscal Years 2000 
and 2004: 

2004 constant dollars in billions: 

Components of compensation: Cash: Basic pay; 
Fiscal year 2000: $38.4; 
Fiscal year 2004: $47.4; 
Percentage change: 23%. 

Components of compensation: Cash: Housing allowance; 
Fiscal year 2000: $7.3; 
Fiscal year 2004: $12.0; 
Percentage change: 66%. 

Components of compensation: Cash: Subsistence allowance; 
Fiscal year 2000: $3.1; 
Fiscal year 2004: $3.4; 
Percentage change: 8%. 

Components of compensation: Cash: Special and incentive pays; 
Fiscal year 2000: $3.3; 
Fiscal year 2004: $4.3; 
Percentage change: 30%. 

Components of compensation: Cash: Allowances; 
Fiscal year 2000: $1.9; 
Fiscal year 2004: $3.5; 
Percentage change: 84%. 

Components of compensation: Cash: Tax advantage; 
Fiscal year 2000: $5.3; 
Fiscal year 2004: $6.4; 
Percentage change: 22%. 

Components of compensation: Cash: Total cash; 
Fiscal year 2000: $59.3; 
Fiscal year 2004: $77.0; 
Percentage change: 30%. 

Components of compensation: Noncash benefits: Subsistence in kind; 
Fiscal year 2000: $1.2; 
Fiscal year 2004: $3.5; 
Percentage change: 185%. 

Components of compensation: Noncash benefits: Other[A]; 
Fiscal year 2000: $10.3; 
Fiscal year 2004: $10.0; 
Percentage change: (3%). 

Components of compensation: Noncash benefits: Education[B]; 
Fiscal year 2000: $0.4; 
Fiscal year 2004: $0.7; 
Percentage change: 68%. 

Components of compensation: Noncash benefits: Installation based 
benefits[C]; 
Fiscal year 2000: $4.4; 
Fiscal year 2004: $5.2; 
Percentage change: 20%. 

Components of compensation: Noncash benefits: Health care; 
Fiscal year 2000: $8.7; 
Fiscal year 2004: $9.7; 
Percentage change: 11%. 

Components of compensation: Noncash benefits: Family housing and 
barracks; 
Fiscal year 2000: $3.2; 
Fiscal year 2004: $3.1; 
Percentage change: (1%). 

Components of compensation: Noncash benefits: Total noncash; 
Fiscal year 2000: $28.2; 
Fiscal year 2004: $32.2; 
Percentage change: 14%. 

Components of compensation: Deferred benefits: Retired pay accrual; 
Fiscal year 2000: $12.2; 
Fiscal year 2004: $12.8; 
Percentage change: 5%. 

Components of compensation: Deferred benefits: VA compensation and 
pension; 
Fiscal year 2000: $9.0; 
Fiscal year 2004: $11.1; 
Percentage change: 23%. 

Components of compensation: Deferred benefits: VA health care; 
Fiscal year 2000: $8.4; 
Fiscal year 2004: $10.3; 
Percentage change: 23%. 

Components of compensation: Deferred benefits: VA other; 
Fiscal year 2000: $0.9; 
Fiscal year 2004: $1.1; 
Percentage change: 23%. 

Components of compensation: Deferred benefits: Health care accrual; 
Fiscal year 2000: $5.1; 
Fiscal year 2004: $13.6; 
Percentage change: 166%. 

Components of compensation: Deferred benefits: Total deferred; 
Fiscal year 2000: $35.6; 
Fiscal year 2004: $48.9; 
Percentage change: 38%. 

Total compensation; 
Fiscal year 2000: $123.1; 
Fiscal year 2004: $158.1; 
Percentage change: 29%. 

Source: GAO analysis. 

Notes: According to DOD officials, there were over 100,000 mobilized 
reservists paid out of the cash compensation in fiscal year 2004. For 
more detail on sources, see app. I. 

[A] Includes separation pay, partial dislocation allowance, 
transportation subsidy, permanent change of station, adoption expenses, 
savings deposit program, other personnel support, special support, 
social security tax, unemployment benefits, special compensation, VA 
home loan, death gratuities, survivor benefits, and other costs. 

[B] Includes education, off-duty voluntary education, and servicemember 
GI bill and certification. 

[C] Includes exchanges, commissaries, childcare, DOD dependent schools, 
and other morale, welfare, and recreation costs. 

[End of table]

In addition, special and incentive pays grew about 30 percent--from 
$3.3 billion to $4.3 billion--from fiscal years 2000 through 2004. This 
increase is substantial on a percentage basis, but special and 
incentive pays are not driving the overall budget trends because the 
amount is a relatively small portion of the overall compensation cost. 
By our calculations, these special pays only represent about 6 percent 
of cash compensation, and about 3 percent of total compensation, on 
average. DOD has more than 60 different special pays that fall into 
this category including reenlistment bonuses and hazardous duty pay, as 
well as other pays for specific duties like aviation, medical, and 
incentives for servicemembers to take certain assignments among others. 
Because most compensation is determined by factors such as tenure, 
rank, location, and dependent status, these special pays and allowances 
are the primary monetary incentives DOD has for servicemembers other 
than promotions. 

Heavy Emphasis on Benefits Reflects DOD Commitment to Servicemembers 
and Their Families, but Is Unlike Civilian Counterparts and Inefficient 
for Recruiting and Retention: 

Noncash and deferred benefits made up just over half of the total costs 
of providing military compensation since 2000. DOD has historically 
viewed noncash benefits as critical to morale, retention, and the 
quality of life for servicemembers and their families. In April 2002, 
DOD issued a strategic human capital plan addressing quality-of-life 
issues and benefits. According to DOD officials, the plan, entitled A 
New Social Compact: A Reciprocal Partnership Between the Department of 
Defense, Service Members and Families, is needed to ameliorate the 
demands of the military lifestyle, which includes frequent separations 
and relocations, and to provide better support to servicemembers and 
their families. It emphasizes the need to maintain programs and 
services viewed as benefits by servicemembers. Furthermore, we recently 
reported that DOD has instituted a number of benefits that reflect 
demographic changes in the active duty force--primarily the increase in 
servicemembers with family obligations.[Footnote 23] Compared to 
civilians in government and in the private sector, the military's 
compensation costs are much more heavily weighted toward benefits and 
deferred compensation like retirement and health care for retirees. 

Efficiency, as defined by DOD, is the amount of military compensation-
-no higher or lower than necessary--that is required to fulfill the 
basic objective of attracting, retaining, and motivating the kinds and 
numbers of active duty servicemembers needed.[Footnote 24] However, the 
efficiency of some benefits is difficult to assess because the value 
that servicemembers place on them is different and highly 
individualized. It is generally accepted and a recent study indicates 
that some deferred benefits, such as retirement, are not valued as 
highly by servicemembers as current cash compensation.[Footnote 25]

Military Compensation System Is Weighted Toward Noncash and Deferred 
Benefits: 

In fiscal year 2004, noncash and deferred benefits made up about 51 
percent of total compensation costs, on average. This means that it 
costs the government more to provide benefits and deferred compensation 
than current cash compensation. Of this, deferred benefits represented 
a significant portion of noncash compensation, as figure 2 shows. Since 
2000, deferred benefits have made up about one-third of total 
compensation costs. These benefits are the promise of future 
compensation--like retirement pay and health care as well as other 
benefits--for active duty servicemembers who retire with at least 20 
years of service or who leave the force and become eligible for 
veterans benefits. Deferred benefits impact the current cost of 
compensation because monies must be set aside today to provide these 
benefits in the future, over the servicemember's lifetime. 

Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation 
Costs per Active Duty Servicemember in Fiscal Year 2004: 

[See PDF for image]

Note: Over 100,000 mobilized reservists were paid out of total cash 
compensation. Accounting for those reservists, the average cash 
compensation was about $49,000 per servicemember. These costs reflect 
the average costs to the government to provide these components of 
compensation. For example, all servicemembers do not receive a cash 
housing allowance, because some servicemembers live on base in family 
housing or barracks. The cost presented represents the total amount 
appropriated for housing allowances divided by the number of 
servicemembers, thus, an average cost to the government. 

[End of figure]

Civilian Compensation Emphasizes Salary and Wages: 

While it is difficult to make direct comparisons between military and 
civilian compensation because of the accessibility of some benefits 
(e.g., health care, retirement to private sector employees), it seems 
clear that, in general, DOD compensation is weighted much more heavily 
toward benefits. Some private sector organizations and the federal 
government provide benefits similar to those provided by the military, 
such as retirement, health care, paid time off, and life insurance; 
military benefits, in some instances, far exceed those offered by the 
private sector, such as free health care and housing as well as 
discount shopping.[Footnote 26]

In contrast to the mix of compensation for the military, figure 3 shows 
that civilian counterparts in the private sector and the federal 
government receive, in broad terms, most of their compensation in cash 
salary/wages. Civilians in private industry, on average, received about 
82 percent in salary and wages while federal government civilians 
received about 67 percent in salary and wages. Thus, one third or less 
of these workers' compensation is typically in the form of benefits or 
deferred compensation. 

Figure 3: 2003 Mix Salary/Wages and Benefits in Civilian Compensation: 

[See PDF for image]

Note: Average compensation costs are in 2004 dollars. 

[End of figure]

Current Mix Is Highly Inefficient for Recruiting and Retention: 

The mix of compensation is highly inefficient for meeting near-term 
recruiting and retention needs. Cash pay today is generally accepted as 
a far more efficient tool than future cash or benefits for recruiting 
and retention. Because the preference for cash is particularly strong 
in young adults, this adage is especially true for the military because 
the active duty workforce is mainly comprised of people in their 
twenties. For example, a recent study offering servicemembers a choice 
of lump-sum payments or annuities found that a vast majority of 
servicemembers preferred a lump-sum cash payment versus deferred 
compensation in the form of an annuity.[Footnote 27] According to the 
study, more than 50 percent of officers and 90 percent of enlisted 
servicemembers had discount rates of at least 18 percent; that is, they 
value $1 received in 20 years to be worth only about 4 cents today. The 
study also found that the preference for cash today was particularly 
strong among younger servicemembers. 

This "personal discount rate" has important implications for military 
compensation policy, especially when it comes to considering deferred 
benefits or compensation. Not only do people heavily discount the value 
of future benefits, less than one in five in the military will receive 
the most lucrative and costly benefits offered by the military, 
specifically active duty retirement pay and health care benefits. This 
is because only 17 percent of those who join the military will 
ultimately serve a 20-year career and thus earn nondisability 
retirement pay and health care for life. Figure 4 illustrates that 
based on current actuarial assumptions, 47 percent of new officers and 
15 percent of new enlistees attain 20 years of active duty 
service.[Footnote 28] Thus, a significant portion of the compensation 
budget--about 17 percent--is being allocated to provide for future 
retirement pay and health care for current active duty members who will 
become eligible to receive these benefits even though a relatively 
small percent of the force will ultimately receive these benefits. 

Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 20- 
Year Career: 

[See PDF for image]

[End of figure]

Taking together the personal discount rate and the relatively few 
servicemembers who earn retirement benefits, defense compensation 
analysts have suggested that this is an inefficient allocation of the 
overall compensation investment. This insight is not new, and is likely 
a key reason why private sector companies have such a high proportion 
of cash in their compensation mix. Thus, DOD's current approach to 
compensation raises serious questions about the reasonableness and 
appropriateness of continuing to weight compensation toward noncash and 
deferred benefits. However, DOD officials told us they feel that this 
efficiency argument about entitlements is often outweighed by the 
desire in DOD and in Congress to "take care" of servicemembers and 
their families. This makes adjusting compensation extremely difficult 
for decision makers, especially amid concerns of eroding benefits, as 
discussed later in this report. When concerns have arisen, benefits 
have often been added with little consideration of what they will cost, 
how they compare with overall market data, whether costs are affordable 
and sustainable over the long term, or their effectiveness and return 
in terms of recruiting or retention. The cumulative effect of this 
approach raises serious questions about the reasonableness, 
appropriateness, affordability, and sustainability of the current 
military compensation system in light of 21st century trends and 
challenges. 

DOD's Lack of an Effective Communication and Education Effort on 
Compensation Has Allowed Servicemembers' Misperceptions and Concerns 
about Their Compensation to Perpetuate: 

According to DOD surveys and analysis of our focus group findings and 
survey data, many servicemembers are dissatisfied, and in some cases, 
harbor significant misperceptions about their pay and benefits in part 
because DOD does not effectively educate them about the competitiveness 
of their total compensation packages. This has led to an atmosphere of 
perpetual dissatisfaction and misunderstanding about compensation among 
servicemembers. Servicemembers tend to be more satisfied with their 
total compensation packages than with specific aspects of their pay and 
benefits. They continue to express dissatisfaction with specific 
aspects of their compensation. In our focus groups, servicemembers had 
misperceptions about compensation; specifically (1) they underestimated 
the costs of their compensation and how it compares to civilian wages, 
(2) were unaware of or confused about certain aspects of their 
compensation, and (3) were concerned about erosion of benefits. 

Servicemembers Have Found DOD's Efforts to Educate Them about Their 
Compensation Unreliable and Difficult to Access: 

It is industry best practice for employers to educate employees about 
the value of their pay and benefit components of their compensation. We 
also believe that by communicating the value of the compensation 
investment and ensuring it is understood, DOD will ensure an increased 
return on their investment because employees who know the value of 
their total compensation packages are more likely to be engaged and 
motivated in their work. In addition, past studies suggest that 
revealing more information about components of compensation has a 
greater impact on the component's satisfaction rate than the actual 
amount itself.[Footnote 29] Servicemembers, especially enlisted 
personnel, said they frequently relied on unofficial sources of 
information, such as word of mouth or service newspapers. Many 
servicemembers discussed how the official sources of information 
available are often difficult to access or appear to them to be 
dishonest or misleading. 

DOD makes various efforts to educate servicemembers by providing annual 
earnings statements (see app. II for a sample of Personal Statement of 
Military Compensation) providing online information on compensation, 
and providing servicemembers access to personnel specialists to answer 
questions. However, servicemembers stated that the online services 
frequently are down or that it is difficult to access services such as 
the "myPay" Web site.[Footnote 30] DOD officials acknowledge that 
access to the "myPay" Web site has been a long-standing, recognized 
problem that is a result of efforts to ensure the security of the 
personal pay information available on the site. Over half of our focus 
groups commented on how unhelpful official sources are to them in 
understanding aspects of compensation. Many stated that the annual 
earnings statement, at times referred to despairingly in our focus 
groups as the "lie sheet," was not believable because they do not 
understand how the amounts identified as their total compensation 
(noncash and deferred) were calculated.[Footnote 31] Enlisted members 
and officers told us that they felt recruiters and personnel 
specialists often gave misguided information or could not provide 
answers to servicemembers' questions on compensation. Additionally, 
members often discussed how the lack of comprehensive communication and 
education on compensation is a problem because they often find 
themselves unaware of certain additions or changes to their pay and 
benefits. Servicemembers offered suggestions as to how to improve 
education on compensation by consolidating information into a single 
location to obtain information on all pay and benefit elements, while 
assuring it is clearly accessible and easy to understand. DOD officials 
acknowledge that generally servicemembers do not realize the full value 
of their compensation and have misperceptions about their compensation. 
The Defense Finance and Accounting Service is implementing tools to 
address these problems. To date, they have developed a newsletter--that 
provides information on changes to compensation or information about 
compensation that is widely misunderstood or unknown, such as how to 
get a "myPay" Web site access code, and bulletins that provide 
information on specific topics of interest that are sent to Army 
personnel and plan to expand these tools to the other services. 

The efforts made to date by DOD to explain the value and 
competitiveness of compensation stands in contrast to the substantial 
investment the department makes to recruit new members. As of fiscal 
year 2003, the department was spending over $13,000 per enlisted 
recruit for advertising, bonuses, incentives, and recruiter pay and 
support.[Footnote 32] We do not have comparable data on what the 
department spends to educate servicemembers on compensation, but DOD 
officials told us that it has not been a priority department wide and 
DOD has never mounted a comprehensive campaign to explain the 
competitiveness of its compensation to servicemembers. 

Servicemembers Tend to Be More Satisfied with Their Total Compensation 
Package than with Specific Aspects of Their Compensation: 

During the 1990s, the military benefit package was significantly 
enhanced in response to servicemembers' concerns of eroding benefits; 
yet servicemembers have continued to express dissatisfaction with many 
aspects of their compensation. In the 2002 Status of Forces Surveys of 
Active Duty Servicemembers, participants were asked to rate their 
satisfaction with specific components within their military 
compensation. As figure 5 shows, a substantial percentage of 
servicemembers were dissatisfied with numerous aspects of their 
compensation, including basic and special pays and housing and 
subsistence allowances. 

During more than half of our focus groups, servicemembers cited base 
pay, the subsistence and housing allowance, and special and incentive 
pays as reasons for dissatisfaction along with health care and others. 
In general, officers tended to be more satisfied with base pay than 
were enlisted personnel. Six of the eight focus groups with senior 
enlisted servicemembers expressed dissatisfaction with their pay 
especially compared to junior officers, who the senior enlisted 
servicemembers perceive as having less experience and relying on them 
for on-the-job training. While members recognized that there have been 
improvements in the housing allowance with DOD's recent effort to 
increase the allowance,[Footnote 33] they complained that these 
increases have had little effect because they perceive that landlords 
increase rent by the same amount. Additionally, 8 of our 40 focus 
groups discussed how it is unfair that servicemembers with dependents 
receive more housing allowance than single members. Moreover, members 
had varying perceptions about special pays and incentives. Some were 
dissatisfied with the amount of special pays and thought they should be 
increased. Others were dissatisfied because it was unclear to them why 
everyone does not receive special pays. This is particularly true for 
senior enlisted pay grades that are ineligible for reenlistment 
bonuses. Furthermore, health care was most frequently discussed as a 
source of dissatisfaction as well as satisfaction. While servicemembers 
were satisfied with the minimal to no cost of health care for 
themselves and their family, 31 of our 40 focus groups commented on 
their dissatisfaction with the quality and access to health care. 
Additional reasons of why servicemembers most frequently reported these 
components and others as sources of dissatisfaction are listed in 
figure 5. 

Figure 5: Reasons for Servicemembers' Dissatisfaction with Pay and 
Benefits: 

[See PDF for image]

Note: For the Active Duty Status of Forces survey, DMDC utilized 
stratified random sampling, where all members of a population are 
categorized into homogeneous groups, procedures to ensure adequate 
sample sizes for their reporting categories, thereby creating 
generalizable findings with a sampling error of +/-2 percent. Our focus 
group survey results are not generalizable because we did not use 
random sampling to collect the data. For more information on our focus 
group methodology see app. I. 

[A] We asked servicemembers separate questions about their satisfaction 
with medical and dental care. The numbers reflected above are 
servicemembers' dissatisfaction with medical care. Nineteen percent of 
enlisted personnel and 12 percent of officers reported they were 
dissatisfied with their dental care, while 40 percent of enlisted 
personnel and 32 percent of officers reported they were dissatisfied 
with their families' dental care. 

[End of figure]

Although servicemembers expressed dissatisfaction with certain pays and 
benefits, many were more satisfied when considering compensation as a 
whole in the Status of Forces survey. DOD surveys in 2003 and 2004 
showed that about 47 percent of servicemembers were satisfied with 
their overall cash compensation (i.e., base pay, allowances, and 
bonuses), which is significantly more than their satisfaction with 
specific aspects of their compensation. This was evident during our 
focus groups as well: servicemembers were often more satisfied with 
their compensation overall than they were with specific aspects of 
their compensation, like the housing allowance. 

Despite their dissatisfaction with many aspects of their compensation, 
servicemembers expressed a clear preference for cash when asked if they 
would make any changes to the compensation system. In 35 of our 40 
focus group sessions, servicemembers were willing to decrease their 
noncash benefits if those benefits were replaced with cash. For 
example, servicemembers in our focus groups said that they prefer 
frequenting off-base discount stores more than the commissaries and 
exchanges. Also, servicemembers in our focus groups said they would 
prefer the cash equivalent to their medical coverage in order to obtain 
their own health care because of their dissatisfaction with the present 
choice. Servicemembers, especially junior officers who said they do not 
intend to stay in the military for a full 20-year career, told us that 
they would prefer DOD to give them cash that they could invest toward 
their retirement.[Footnote 34] Comments like these, which we heard 
frequently, seem to support past studies indicating servicemembers have 
a strong preference for cash compensation today.[Footnote 35] However, 
such personal preferences were offset by other concerns. Specifically, 
during 16 of our 40 focus group sessions, servicemembers expressed 
concern that if they were to receive an increase in cash it would not 
equal the value of their current noncash or deferred benefit. Or, 
changing to more cash compensation might not be in the best interest of 
all members, especially the junior enlisted personnel, who might not 
manage their finances well. 

Servicemembers in Our Focus Groups Expressed Certain Misperceptions and 
Concerns about Their Compensation: 

During our focus group discussions, servicemembers (1) underestimated 
the cost of their compensation and how their compensation compares to 
civilian wages, (2) were unaware of or confused about certain aspects 
of their compensation, and (3) were concerned about erosion of 
benefits. These findings suggest that a culture of dissatisfaction and 
misunderstanding about compensation exists among servicemembers. 

Underestimation of Total Compensation: 

Servicemembers consistently underestimated how their pay compares to 
the private sector. Almost 80 percent of servicemembers participating 
in our focus groups reported in our survey of focus group participants 
that they believe they are paid less than their civilian 
counterparts.[Footnote 36] In addition, during the focus groups 
servicemembers frequently discussed how they were dissatisfied with 
their military pay because they believe that they could make more "on 
the outside" as a civilian.[Footnote 37] Moreover, when asked how much 
DOD spends on cash pays, retirement, and health care for them, 9 out of 
10 servicemembers participating in our focus groups underestimated how 
much it cost to provide their compensation. 

While some specific skill groups could likely make considerably more in 
civilian jobs, such perceptions of noncompetitive compensation seem to 
be inaccurate in broad terms. The most recent Quadrennial Review of 
Military Compensation--a DOD commission that reviews military 
compensation--found that cash compensation fares favorably overall to 
civilian wages. Specifically, they compared cash compensation 
(including tax advantage, but not including special pays or benefits) 
with comparably educated civilians. They found that, on average, 
military pay was at the 70th percentile or higher of civilian 
wages.[Footnote 38] It should also be noted that this review of 
military compensation found that, based on historical data, when DOD 
pays servicemembers at around the 70th percentile of civilian wages it 
is competitive in the employment market--that is, DOD has generally not 
experienced recruiting or retention problems when compensating 
servicemembers at this level. In sum, this means that DOD seeks to pay 
servicemembers competitive cash wages when compared to civilians and, 
at the same time, provides increasingly expensive benefits that are in 
most cases much greater than those provided by the private sector. 

Lack of Awareness or Understanding of Aspects of Compensation: 

Although most servicemembers were aware that their compensation was a 
complex mix of cash and benefits, some servicemembers were unaware of 
certain aspects of their compensation; for example, servicemembers were 
not aware of which retirement system they fell under or specifics about 
their retirement benefits. Some servicemembers expressed confusion on 
the repeal of the REDUX retirement system or did not realize that 
retired members and their dependents now receive health insurance for 
life under the military's healthcare system, TRICARE. Also, 
servicemembers did not understand and had misperceptions about many 
components of their cash compensation. For instance, some enlisted 
members were unsure as to how special pays were allocated, while others 
were not as familiar with the federal tax advantage they receive. 
Additionally, servicemembers showed frequent misperceptions about the 
subsistence allowance being designed for the member and not the family. 
Moreover, servicemembers often complained of how they did not know how 
to access information about health care benefits for their family. 

In contrast to pay and benefits, focus group participants seldom raised 
deferred compensation as a reason for dissatisfaction or satisfaction, 
and few junior enlisted personnel included deferred benefits when 
describing their compensation. Some servicemembers expressed concern 
about losing deferred benefits that were implicitly promised to them as 
part of joining the military. In addition, a majority of the focus 
groups did not recognize veterans' benefits as a component of their 
military compensation. Of the servicemembers who discussed veterans' 
benefits, they focused on the home loan program.[Footnote 39]

Concern about Eroding Benefits: 

During the 1990s, some servicemembers expressed concerns that their 
benefits were eroding, particularly their health care and retirement 
benefits. In response to such concerns, the military benefit package 
has been significantly enhanced. In recent years, for example, Congress 
restored retirement benefits that had previously been reduced for some 
servicemembers, significantly expanded their retirement health 
benefits, and allowed concurrent receipt of disability and retirement 
pay. However, leaders in both the enlisted and officer ranks in our 
focus groups were concerned that their benefits have still been eroding 
despite these recent efforts. They often talked about retirement 
benefits worsening as well as about decreases in base services provided 
through the Morale, Welfare, and Recreation organization--such as 
outdoor recreational equipment discounted rentals. 

Conclusions: 

DOD is maintaining an increasingly expensive and complex military 
compensation system comprising a myriad of pays and benefits. With the 
costs scattered across the federal budget, decision makers within the 
administration and Congress have insufficient transparency over the 
total costs to compensate servicemembers, particularly with respect to 
deferred costs, such as TRICARE--which is projected to experience 
explosive growth in the future. Moreover, changes to the compensation 
system are made in a piecemeal fashion with an imprecise understanding 
of how the changes will affect the total cost of compensation or what 
return on investment decision makers should expect in terms of 
recruiting and retention. This lack of transparency is becoming a more 
urgent matter today as DOD and all federal agencies face tough choices 
ahead managing the serious and growing long-term fiscal challenges 
facing the nation. For DOD, these trade-offs could become as 
fundamental as investing in people versus investing in hardware--tough 
choices for a military with aging infrastructure and equipment that 
could have readiness implications in the future. Compiling 
comprehensive information about the total cost of compensation--as well 
as how it is allocated to cash and benefits--would be a crucial first 
step for the department and Congress to lay a foundation for future 
decisions. Without such information, decision makers at DOD and 
Congress do not know what it is costing the government to compensate 
servicemembers. Furthermore, DOD has not performed the analysis 
necessary to determine whether its current allocation to cash and 
benefits is reasonable or appropriate. With dramatic increases in 
compensation costs and an expanding budget--mostly resulting from 
supplemental appropriations from Congress to fund activities and 
operations related to the Global War on Terrorism--it is highly 
questionable whether the rising costs and current allocations are 
affordable and sustainable over the long term, especially when 
supplemental funding recedes. Again, because DOD's compensation system 
lacks transparency over these issues, the decision makers in the 
administration and Congress cannot adequately assess whether DOD's 
current approach to compensation is most efficiently meeting its needs 
for both today and tomorrow. 

DOD also faces a sobering marketing challenge--convincing skeptical 
servicemembers that their compensation is competitive, overall. The 
department's efforts thus far have been ineffective, and military 
members are still dissatisfied with key aspects of their compensation, 
and harbor several misperceptions and concerns that their compensation 
is eroding, or will in the future. Pay comparison studies conducted by 
DOD, however, show that military compensation is quite competitive even 
without considering benefits. Recent efforts to improve benefits for 
retirees have done little to address dissatisfaction among current 
members. This dilemma exists for two reasons: (1) while servicemembers 
do not want to lose benefits, they value future benefits much less than 
current cash; and (2) fewer than one in five of those servicemembers 
who begin military service will ultimately receive those benefits. 
Without more emphasis on marketing the value of the cash pay as well as 
the total compensation received overall, DOD will be unable to improve 
servicemember perceptions, which could have implications for future 
recruiting and retention efforts. 

Recommendations for Executive Action: 

To improve transparency over total compensation; to ensure the 
compensation system is reasonable, appropriate, affordable, and 
sustainable; and to better educate servicemembers about the 
competitiveness of their compensation, we recommend that the Secretary 
of Defense take the following three actions: 

* Compile the total costs to provide military compensation and 
communicate these costs to decision makers within the administration 
and Congress--perhaps as an annual exhibit as part of the President's 
budget submission to Congress. In preparing the annual exhibit, DOD may 
want to work with the Office of Management and Budget. 

* Assess the affordability and sustainability of the compensation 
system and its implications on readiness as well as the reasonableness 
and appropriateness of the allocation to cash and benefits and whether 
changes in the allocation are needed to more efficiently achieve 
recruiting and retention goals in the 21st century. 

* Develop a comprehensive communication and education plan to inform 
servicemembers of the value of their pay and benefits and the 
competitiveness of their total compensation package when compared to 
their civilian counterparts that could be used as a recruiting and 
retention tool. 

Matter for Congressional Consideration: 

The Congress should consider the long-term affordability and 
sustainability of any additional changes to pay and benefits for 
military personnel and veterans, including the long-term implications 
for the deficit and military readiness. Furthermore, Congress should 
consider how best to proceed with any significant potential 
restructuring of existing military compensation policies and practices, 
including whether a formal commission may be necessary. 

Agency Comments and Our Evaluation: 

DOD's comments are included in this report as appendix III. DOD 
generally concurred with our recommendations, but raised some technical 
concerns about the way we compiled compensation costs data. 

DOD partially concurred with our first recommendation to compile the 
total costs to provide military compensation and communicate these 
costs to decision makers. In DOD's response, it noted that it agrees 
with the goal of making total compensation costs transparent to 
decision makers; however, the department noted that this may be a more 
appropriate issue for the Office of Management and Budget since the 
costs extend to four departments. As we noted in our report, lack of 
transparency over costs is in part due to the sheer number of pays and 
benefits that make up the military compensation system and the lack of 
a single source to show total cost of compensation. By establishing 
transparency of total military compensation costs, DOD would have a 
more complete picture of how its military members are being compensated 
and be in the best position to compile these costs for decision makers. 

DOD concurred with our second recommendation and stated that it is 
already engaged in multiple simultaneous efforts to assess the 
overarching military personnel compensation strategy. In addition, DOD 
said that it will continue to actively point out the impact of the 
legislative process to Congress as it did with concurrent receipt, the 
survivor benefit program, and expanding retiree health care. 

DOD partially concurred with our third recommendation to develop a 
comprehensive communication and education plan to inform servicemembers 
of the value of their pay and benefits and the competitiveness of their 
total compensation package when compared to their civilian 
counterparts. The department acknowledged that there is a perception 
that military compensation is underreported and undervalued, but 
pointed out that all of the services as well as the Office of the Under 
Secretary of Defense for Personnel and Readiness currently have 
multiple resources available for servicemembers, including Web sites, 
such as the Navy's electronic pay and compensation calculator, and 
brochures, such as the Air Force's compensation fact sheet. We believe, 
as discussed in our report, that these official sources are not 
effective, because of the continuing dissatisfaction with compensation. 
DOD said that it will explore an information/marketing campaign that 
will improve understanding of the system. 

DOD also raised technical concerns; specifically, it believed that we 
did not adequately describe the impact of the increase in funding 
related to the Global War on Terrorism as well as how we converted the 
costs to constant year dollars. In its comments, DOD stated that the 
fiscal year 2004 compensation costs included over $17 billion in 
supplemental funding for the war on terrorism, and much of this funding 
was used to pay for mobilized reservists. While it is true that our 
estimates include supplemental funding, we do not believe that the 
inclusion of this funding changes our findings or conclusions. 
Supplemental funding represents real costs to the federal government 
that we believe are appropriate to include when calculating how much 
the federal government spends on compensating military members. 
However, we took DOD's concerns into account and added footnotes in our 
report to explain our approach. DOD also raised concerns about our use 
of end strength instead of average strength in our per capita 
calculations. We believe that end strength, which represents only 
active population, is an appropriate denominator to calculate per 
capita active duty costs because it provides a consistent population to 
spread costs of cash, noncash benefits, and deferred benefits. To use 
average strength, which includes mobilized reservists, would not have 
been an accurate representation of active duty per capita costs for 
noncash and deferred benefits. However, in response to this comment, we 
added footnotes that indicate that the cash compensation for fiscal 
year 2004 includes costs for mobilized reservists and including those 
reservists in our per capita calculations would have decreased cash 
compensation by about $5,000 per servicemember. Finally, DOD raised 
concerns about our adjustments for inflation in our data. We used the 
National Defense Budget Estimates published by the Office of the Under 
Secretary of Defense (Comptroller). According to the document, the 
deflators we used provide inflation indexes in base years for each DOD 
appropriation title to be used in converting total obligation authority 
from current to constant dollars. To address DOD's concerns that the 
total cost data are not accounting for the fact that the military pay 
raises have been larger than other civilian pay raises, we added 
footnotes that compared military pay increases, which averaged over 21 
percent between fiscal years 2000 and 2004, to the all urban workers 
Consumer Price Index and the Employment Cost Index for civilian wages 
and salaries, which over the same period increased 9.7 percent and 13.3 
percent, respectively. 

We are sending copies of this report to the Secretary of Defense. In 
addition, the report will be available at no charge on GAO's Web site 
at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202)512-5559 [Hyperlink, Stewartd@gao.gov]. Other staff 
members who made key contributions to this report are listed in 
appendix IV. 

Signed by: 

Derek B. Stewart: 
Director, Defense Capabilities and Management: 

List of Congressional Committees: 

The Honorable John Warner, Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Duncan L. Hunter, Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Lindsey Graham, Chairman: 
The Honorable Ben Nelson: 
Ranking Minority Member: 
Subcommittee on Personnel: 
Committee on Armed Services: 
United States Senate: 

The Honorable John M. McHugh, Chairman: 
The Honorable Vic Snyder: 
Ranking Minority Member: 
Subcommittee on Personnel: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Ted Stevens, Chairman: 
The Honorable Daniel K. Inouye: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable C. W. Bill Young, Chairman: 
The Honorable John P. Murtha: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

Calculation of the Costs of Providing Active Duty Compensation: 

To calculate the cost of compensating active duty servicemembers to the 
federal government, we interviewed officials from the Department of 
Defense (DOD) including the Office of the Secretary of Defense, 
Undersecretary for Personnel and Readiness' office of compensation, the 
office of the Comptroller within the Office of Secretary of Defense and 
the services, the Office of the Actuary, and Health Affairs. In 
addition, we interviewed officials from Department of Veterans' Affairs 
(VA), Department of Labor, Department of Education, Office of 
Management and Budget, and the Congressional Budget Office. See table 4 
for an overview of our sources of information. In comparing the mix of 
cash and noncash compensation of active duty servicemembers to that of 
private industry employees and federal civilians, we used the 
Department of Commerce's Bureau of Economic Analysis data to determine 
the typical percentage of compensation that is allocated to 
salary/wages and benefits in private industry and federal civilian 
compensation systems. 

We examined and compiled data for fiscal years 2000-2004 from the Army, 
Air Force, Marine Corps, and Navy's military personnel and operations 
and maintenance budget justification books. Within the operations and 
maintenance justification books, we reviewed the budgets of the defense 
health program; the defense commissary agency; the morale, welfare and 
recreation activities (OP-34 exhibit); and DOD dependent education 
activity. In addition, we reviewed and compiled data from the future 
years defense planning document. We also reviewed and compiled data 
from the VA benefits and health care budget justification books. We 
used deflators to adjust the budget appropriations into current fiscal 
year 2004 dollars. 

To estimate the total federal tax expenditure that results from the tax-
exempt housing and subsistence allowances military personnel receive, 
we grouped servicemembers by earnings, allowances, and tax status for 
the years 2000 to 2004 and used the National Bureau of Economic 
Research's TAXSIM Model to simulate tax liabilities under different 
scenarios.[Footnote 40] Only military income was considered. 
Nonmilitary income, such as spousal earnings or investment income, 
would likely increase marginal tax rates and, thus, increase our tax 
expenditure estimates.[Footnote 41] A servicemember's earnings and tax 
status were determined by rank, years of service, and number of 
dependents.[Footnote 42] Allowances are determined by rank and number 
of dependents, and we assumed servicemembers living on-base received 
the average housing allowance of similar servicemembers living off- 
base. The number of servicemembers in each group for each year was 
provided by the DOD's Selected Military Compensation Tables. The tax 
expenditure for each group is estimated as the number of servicemembers 
in the group multiplied by the difference in the tax liabilities of a 
representative member of the group assuming that the allowances are and 
are not taxable. 

To estimate health care accrual costs, we used official estimates of 
accrual health care costs for all retirees and their dependents 
provided by DOD's Office of the Actuary. Since 2003, health care costs 
for retirees over 65 years of age and their dependents are accrual- 
budgeted in the DOD Military Personnel budget. However, health care 
costs for retirees under 65 years of age and their dependents are 
budgeted through an annual appropriation to the Defense Health Program 
(DHP). Because the DHP annual budget includes health care costs for 
active duty servicemembers and their dependents as well as retirees 
under 65 and their families, we had to estimate the share of DHP costs 
associated with active duty servicemembers and their dependents for the 
fiscal years 2000-2004. Using similar methodology employed by the 
Congressional Budget Office, we transformed DHP enrollee data (broken 
out by gender, age category,[Footnote 43] and whether they were active 
duty personnel, family of active duty personnel, retirees under 65, or 
family of retirees under 65) into equivalent demand units, because 
enrollees do not all have the same underlying demand for health care 
services--average health care expenditures and reliance upon DHP differ 
across the groups.[Footnote 44] The estimated share of DHP dollars due 
to active duty service is the ratio of equivalent demand units for 
active duty personnel and their families to the total number of 
equivalent demand units in DHP. We first used the Medical Expenditures 
Panel Survey (MEPS) to estimate the average total health care 
expenditures each year (2000-2004) by gender and age category.[Footnote 
45] Estimates of relative use were derived by dividing all estimates by 
the average total health care expenditures for males ages 18 to 44 (the 
comparison group). Second, reliance rates for DHP were provided by the 
DOD from the annual Military Health Care Survey for active duty 
personnel, their families, and retirees under 65 and their families. 

To calculate the costs of future veterans' benefits for current active 
duty servicemembers, including the costs for health care, compensation, 
pension, and other types of benefits, we used notional costs as a 
percentage of basic pay of accruing and actuarially funding VA benefits 
in the DOD budget. The notional cost percentages we used were 
unofficial Office of Management and Budget estimates. These estimates 
were based on the most recent official percentages shown in table 12-2 
of the 1999 President's Budget. 

Determination of Active Duty Servicemembers' Perceptions of Their 
Compensation: 

To determine servicemembers' satisfaction and dissatisfaction with 
components of their compensation, we reviewed past DOD surveys, 
including the 2002, 2003, and 2004 Status of Forces Surveys. The 2002 
survey administered to over 30,000 servicemembers had a response rate 
of 32 percent. DOD has conducted and reported on research to assess the 
impact of nonresponse rate on overall estimates. It found that, among 
other characteristics, junior enlisted personnel (in pay grades E1 to 
E4), servicemembers who do not have a college degree, and members in 
services other than the Air Force were more likely to be 
nonrespondents. We have no reason to believe that potential nonresponse 
bias not otherwise accounted for by DOD's research is substantial for 
the variables we studied in this report. Therefore, we concluded the 
data to be sufficiently reliable for the purposes of this report. To 
determine active duty servicemembers' perceptions of their 
compensation, we conducted 40 focus groups at eight military 
installations across all four services. We gathered supplemental 
information from focus group participants through a survey that asked 
questions to assess knowledge, individual opinions, and attitudes 
toward compensation. 

Focus Groups: 

We conducted 10 focus groups with active duty servicemembers in each of 
the four services, for a total of 40 focus groups. Focus groups involve 
structured small group discussions designed to gain in-depth 
information about specific issues that cannot easily be obtained from 
single or serial interviews. As with typical focus group data 
collection, our design involved multiple groups with certain 
homogeneous factors--such as rank, service, and installation. Each 
group was designed to involve 8 to 12 participants. Discussions were 
held in a structured manner, guided by a moderator who used a 
standardized list of questions. Our overall objective in using a focus 
group approach was to obtain servicemembers' views, insights, and 
feelings about military compensation. 

Scope of Our Focus Groups: 

To ensure we achieved saturation, the point where we were no longer 
hearing new information, we conducted 40 focus groups with multiple 
active duty servicemembers at eight military installations (see table 
4). This design allowed us to identify differences in perceptions of 
servicemembers in different branches of the military and in different 
pay grades. In all focus groups, in order to hear from different 
perspectives, efforts were made to select participants with differences 
in sex, marital status, if the member lived on base or off base, and if 
the member had been recently deployed. Focus groups were conducted from 
November 2004 to March 2005. 

Table 3: Composition of Focus Groups: 

Service: Air Force; 
Location: Pope Air Force Base, North Carolina; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7-E9: 1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: 5. 

Location: Army: Scott Air Force Base, Illinois; 
Servicemember pay grade: Enlisted: E1-E4: Army: 1; 
Servicemember pay grade: Enlisted: E5-E6: Army: 1; 
Servicemember pay grade: Enlisted: E7-E9: Army: 1; 
Servicemember pay grade: Officer: O1-O3: Army: 1; 
Servicemember pay grade: Officer: O4-O6: Army: 1; 
Total: Army: 5. 

Service: Army; 
Location: Ft. Benning, Georgia; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7-E9: 1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: 5. 

Location: Navy: Ft. Bliss, Texas; 
Servicemember pay grade: Enlisted: E1-E4: Navy: 1; 
Servicemember pay grade: Enlisted: E5-E6: Navy: 1; 
Servicemember pay grade: Enlisted: E7-E9: Navy: 1; 
Servicemember pay grade: Officer: O1-O3: Navy: 1; 
Servicemember pay grade: Officer: O4-O6: Navy: 1; 
Total: Navy: 5. 

Service: Navy; 
Location: Naval Station Norfolk, Virginia; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7-E9: 1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: 5. 

Location: Marine Corps: Navy Region Southwest, California; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7- E9: M1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: Marine Corps: 5. 

Service: Marine Corps; 
Location: Camp Pendleton, California; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7-E9: 1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: 5. 

Location: Camp Lejeune, North Carolina; 
Servicemember pay grade: Enlisted: E1-E4: 1; 
Servicemember pay grade: Enlisted: E5-E6: 1; 
Servicemember pay grade: Enlisted: E7-E9: 1; 
Servicemember pay grade: Officer: O1-O3: 1; 
Servicemember pay grade: Officer: O4-O6: 1; 
Total: 5. 

Total; 
Servicemember pay grade: Enlisted: E1-E4: 8; 
Servicemember pay grade: Enlisted: E5-E6: 8; 
Servicemember pay grade: Enlisted: E7-E9: 8; 
Servicemember pay grade: Officer: O1-O3: 8; 
Servicemember pay grade: Officer: O4-O6: 8; 
Total: 40. 

Source: GAO analysis. 

[End of table]

Methodology of Our Focus Groups: 

A guide was developed to assist the moderator in leading the 
discussions. The guide helped the moderator address several topics 
related to servicemembers' perceptions of their compensation including 
their definition of compensation, sources of information on 
compensation, satisfaction and dissatisfaction with compensation, and 
any needed changes to compensation. Each focus group started with the 
moderator describing the purpose of the study and explaining how focus 
groups work. Participants were assured that all their comments would be 
anonymous in that their names would not be used in write-ups of the 
sessions or in the report. The participants were then asked open-ended 
questions about their perceptions of military compensation. All focus 
groups were moderated by a GAO analyst, while at least one GAO analyst 
observed and took notes. After each focus group the moderator and note 
taker reviewed the transcript together to verify that all comments were 
captured. 

Content Analysis: 

We performed a systematic content analysis of discussions to categorize 
and summarize participants' perceptions of their compensation. Using 
the primary topics covered in the focus group guide, GAO analysts 
reviewed responses from several of the focus groups and created a list 
of subcategories within each of the primary focus group topics. A GAO 
analyst then reviewed the responses from each focus group and assigned 
each comment to a corresponding category. To ensure inter-rater 
reliability, another analyst also reviewed each comment and 
independently assigned it to a corresponding category. Any comments 
that were not assigned to the same category were then reconciled and 
adjudicated by the two analysts, which led to the comments being placed 
into one or more of the resulting categories. Agreement regarding each 
placement was reached between at least two analysts. The responses in 
each category were then used in our evaluation of how servicemembers 
perceive their compensation. 

Limitations: 

Methodologically, focus groups are not designed to (1) demonstrate the 
extent of a problem or to generalize results to a larger population, 
(2) develop a consensus to arrive at an agreed-upon plan or make 
decisions about what actions to take, or (3) provide statistically 
representative samples or reliable quantitative estimates. Instead, 
focus groups are intended to provide in-depth information about 
participants' reasons for the attitudes held toward specific topics and 
to offer insights into the range of concerns and support for an issue. 

The projectability of the information produced by our focus groups is 
limited for several reasons. First, they represent the responses of 
only the active duty servicemembers in our 40 focus groups. The 
experiences of other active duty servicemembers who did not participate 
in our focus groups may have varied. Second, while the composition of 
the groups was designed to assure a distribution of active duty 
servicemembers by several characteristics, including sex and marital 
status, the groups were not randomly sampled. 

Despite these limitations, we gathered data from a broad range of 
servicemembers at several strata of the military hierarchy and obtained 
a better understanding of how servicemembers perceive their 
compensation and where they obtain information about their pay and 
benefits. We were also able to obtain information complementary to the 
Status of Forces Survey, which seeks information on satisfaction and 
dissatisfaction among military servicemembers but does not address 
reasons for these perceptions. 

Use of a Survey to Supplement Focus Group Findings: 

We conducted a survey of focus group participants to provide further 
information on servicemembers' perceptions of their compensation. The 
survey was administered and received from the universe of focus group 
participants, which numbered 401. The survey collected additional 
specific information on servicemembers' satisfaction and 
dissatisfaction with their pay and benefits, sources of information on 
their compensation, recommendations for changing compensation, and 
demographic information. 

Since the survey was used to collect supplemental information and 
administered to focus group participants only, the results cannot be 
generalized across the population of active duty servicemembers. The 
results from this data collection effort represent only those who 
participated in our focus groups. 

The objectives of our survey were to collect (1) data that could not 
easily be obtained through focus groups and (2) collect some of the 
same data found in past DOD surveys. 

The practical difficulties of conducting any survey may introduce 
certain types of errors, commonly referred to as nonsampling errors. 
For example, differences in how a particular question is interpreted, 
the sources of information available to respondents, or the types of 
people who do not respond can introduce unwanted variability into 
survey results. To reduce nonsampling errors, we conducted five 
pretests with active duty servicemembers, both enlisted and officers, 
and revised it based on the pretest results. We also performed 
statistical analyses to identify inconsistencies and had a second 
independent reviewer for the data analysis to further minimize such 
error. The surveys were administered in person directly after each 
focus group session. 

To analyze survey results, we ran frequencies for all questions and 
highlighted those where a significant response occurred in a particular 
category. We also compared responses by pay grade and service. 

We conducted our review from August 2004 through May 2005 in accordance 
with generally accepted government auditing standards. 

[End of section]

Appendix II: Sample of a Personal Statement of Military Compensation: 

[See PDF for image] 

[End of figure] 

[End of section]

Appendix III: Comments from the Department of Defense: 

OFFICE OF THE UNDER SECRETARY OF DEFENSE: 
4000 DEFENSE PENTAGON: 
PERSONNEL AND READINESS:
WASHINGTON, D.C. 20301-4000: 

JUN 24 2005: 

Mr. Derek B. Stewart:
Director, Defense Capabilities and Management: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

This is the Department of Defense response to the Government 
Accountability Office (GAO) draft report, "Military Personnel: DoD 
Needs to Improve the Transparency and Reassess the Reasonableness, 
Appropriateness, Affordability, and Sustainability of Its Military 
Compensation System," dated July, 2005 (GAO-05-798). The Department has 
technical concerns with some of the calculations in the draft report, 
but generally concurs with the recommendations. The Department's 
comments are enclosed. 

If you require additional information, please contact Dr. Saul Pleeter 
at (703) 695-9371. The Department appreciates the opportunity to 
comment on the draft report. Thank you for your interest in this 
matter. 

Sincerely, 

Signed by: 

William J. Carr:
Acting Deputy Under Secretary: 
(Military Personnel Policy): 

DEPARTMENT OF DEFENSE COMMENTS GAO DRAFT REPORT GAO CODE 350563/GAO-05- 
798: 

Subject: GAO Draft Report, "MILITARY PERSONNEL: DoD Needs to Improve 
the Transparency and Reassess the Reasonableness, Appropriateness, 
Affordability, and Sustainability of Its Military Compensation System," 
dated June 10, 2005 (GAO Code 350563/GAO-05-798): 

Technical Issues: There are 3 main technical issues with the 
presentation of the data in the draft report (see attached): 

1. No acknowledgement of the Global War on Terrorism (GWOT) costs and 
funding. 
2. Use of end strength vice average strength (workyears) in per capita 
calculations. 
3. Constant dollar adjustments. 

Recommendations: 

RECOMMENDATION l: The GAO recommended that the Secretary of Defense 
compile the total costs to provide military compensation and 
communicate these costs to decision makers within the administration 
and the Congress, perhaps as an annual exhibit as part of the 
President's Budget submission to Congress. (p. 39/GAO Draft Report): 

DOD RESPONSE: Partially concur. GAO's recommendation is to improve 
transparency over total compensation. We agree with this goal. However, 
since the costs for a military member extend to four departments, 
including Treasury, Veterans Affairs, Labor and Housing and Urban 
Development, this may be a more appropriate issue for the Office of 
Management and Budget. 

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
assess the affordability and sustainability of the compensation system 
and its implications on readiness as well as the reasonableness and 
appropriateness of the allocation to cash and benefits and whether 
changes in the allocation are needed to more efficiently achieve 
recruiting and retention goals in the 215` Century. (p. 39/GAO Draft 
Report): 

DOD RESPONSE: Concur. We agree with GAO in the need analyze the 
affordability and sustainability of the military compensation system. 
DoD is already engaged in multiple simultaneous efforts to assess the 
overarching military personnel compensation strategy including the 
Defense Advisory Committee on Military Compensation, the Quadrennial 
Defense Review and the 10th Quadrennial Review of Military 
Compensation. DoD will continue to actively point out the impact of the 
legislative process to Congress as we did with concurrent receipt, the 
survivor benefit program and expanding retiree health care. 

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
develop a comprehensive communication and education plan to inform 
service members of the value of their pay and benefits and the 
competitiveness of their total compensation package when compared to 
their civilian counterparts that could be used as a recruiting and 
retention tool. (p. 40/GAO Draft Report): 

DOD RESPONSE-Partially concur. All of the services currently have 
multiple resources available for service members, including websites, 
brochures and instruction. For example by linking through the Navy 
Personnel Command Website members can access an electronic Pay and 
Compensation Calculator at 
http://www.npc.navy.mil/Careerlnfo/StayNavyTools/CareerTools. This tool 
calculates the sum of members' pay and benefits and breaks them out by 
direct, indirect, and deferred (retired) compensation. It also isolates 
taxable and tax-free compensation and calculates the comparable 
civilian wage that would have to be earned to match military pay and 
allowances. Additionally, the annual "Career Handbook" supplement to 
the Navy's monthly "All Hands" magazine was released in June 2005. The 
supplement provides details on Navy compensation, including pay and 
allowances, educational opportunities, career transition and retirement 
benefits, as well as training, advancement, and commissioning 
opportunities. DoD has also contracted with Ruehlin Associates to 
provide "Career Planning and Management Seminars," during which the 
total military compensation package is discussed as part of career 
decision-making when considering transition to the private sector. 

The Air Force mails an Annual Statement of Military Compensation every 
spring to members. They also prepare a Compensation Fact Sheet 
distributed to First Sergeants (posted to Air Force Personnel Center 
Web site under enlisted/officer retention). Base Career Advisors 
provide briefings to members 13 - 15 months prior to the DOS/EOS for 
retention purposes. 

The Army also sends out an annual report on compensation and maintains 
a website offering additional information. 

The Office of the Under Secretary of Defense for Personnel and 
Readiness has a website that offers comprehensive information 
concerning military compensation. There are nearly a million 'hits' to 
this website each month. In spite of these and other efforts, there is 
a perception that military compensation is underreported and 
undervalued. DoD will explore an information/marketing campaign that 
will improve understanding of the system. 

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Derek Stewart, (202) 512-5559 [Hyperlink, stewartd@gao.gov]. 

Acknowledgments: 

Lori Atkinson, Alissa Czyz, Natasha Ewing, Alison Martin, David 
Mayfield, Lindsey Mosson, James Pearce, John Pendleton, Charles Perdue, 
Terry Richardson, Samuel Scrutchins, and Sonja Ware made key 
contributions to this report. 

[End of section]

Related GAO Products: 

Defense Management: Key Elements Needed to Successfully Transform DOD 
Business Operations. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-629T]
Washington, D.C.: April 28, 2005. 

Military Personnel: Preliminary Observations on Recruiting and 
Retention Issues within the U.S. Armed Forces. 
[Hyperlink, http://www.gao.gov/new.items/d05419t.pdf]
Washington, D.C.: March 16, 2005. 

21st Century Challenges: Reexamining the Base of the Federal 
Government. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP] 
Washington, D.C.: February 2005. 

Military Personnel: DOD Needs More Data Before It Can Determine if 
Costly Changes to the Reserve Retirement System Are Warranted. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-1005] 
Washington, D.C.: September 15, 2004. 

Military Personnel: Survivor Benefits for Servicemembers and Federal, 
State, and City Government Employees. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-814] 
Washington, D.C.: July 15, 2004. 

Military Personnel: DOD Has Not Implemented the High Deployment 
Allowance That Could Compensate Servicemembers Deployed Frequently for 
Short Periods. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-805] 
Washington, D.C.: June 25, 2004. 

Military Personnel: Active Duty Compensation and Its Tax Treatment. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-721R] 
Washington, D.C.: May 7, 2004. 

Military Personnel: Observations Related to Reserve Compensation, 
Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-582T] 
Washington, D.C.: March 24, 2004. 

Military Personnel: Bankruptcy Filings among Active Duty Service 
Members. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-465R] 
Washington, D.C.: February 27, 2004. 

Military Personnel: DOD Needs More Effective Controls to Better Assess 
the Progress of the Selective Reenlistment Bonus Program. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-86] 
Washington, D.C.: November 13, 2003. 

Military Personnel: DOD Needs to Assess Certain Factors in Determining 
Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-554] 
Washington, D.C.: April 29, 2003. 

Military and Veterans' Benefits: Observations on the Concurrent Receipt 
of Military Retirement and VA Disability Compensation. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-575T] 
Washington, D.C.: March 27, 2003. 

Military Personnel: Management and Oversight of Selective Reenlistment 
Bonus Program Needs Improvement. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-149] 
Washington, D.C.: November 25, 2002. 

Military Personnel: Active Duty Benefits Reflect Changing Demographics, 
but Opportunities Exist to Improve. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-935] 
Washington, D.C.: September 18, 2002. 

Military Personnel: Higher Allowances Should Increase Use of Civilian 
Housing, but Not Retention. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-684] 
Washington, D.C.: May 31, 2001. 

Defense Health Care: Observations on Proposed Benefit Expansion and 
Overcoming TRICARE Obstacles. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/T-HEHS/NSIAD-00-129] 
Washington, D.C.: March 15, 2000. 

Military Personnel: Preliminary Results of DOD's 1999 Survey of Active 
Duty Members. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/T-NSIAD-00-110] 
Washington, D.C.: March 8, 2000. 

The Congress Should Act to Establish Military Compensation Principles. 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/FPCD-79-11] 
Washington, D.C.: May 9, 1979. 

(350563): 

FOOTNOTES

[1] The Military Retirement Reform Act of 1986, also known as REDUX, 
had changed the retirement system by (1) reducing the amount received 
at 20 years of service, (2) raising the growth in retired pay for each 
year served after 20 years of service, and (3) reducing the real value 
of retired pay in an inflationary environment. 

[2] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[3] GAO, Key Elements Needed to Successfully Transform DOD Business 
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005). 

[4] Our average costs of compensation includes cash (e.g., basic pay, 
housing allowance, and special tax preference), benefits (e.g., health 
care, education assistance), and deferred benefits (e.g., contributions 
to retirement pay) divided by the end strength. According to DOD, over 
100,000 mobilized reservists have been paid out of active duty cash 
compensation since fiscal year 2002. If these personnel were included, 
the average cost would be about $5,000 lower in fiscal year 2004. 

[5] Congressional Budget Office, Growth in Medical Spending by the 
Department of Defense (Washington, D.C.: September 2003). 

[6] Office of the Under Secretary of Defense for Personnel and 
Readiness, The Report from the Ninth Quadrennial Review of Military 
Compensation (Washington, D.C.: May 2002). 

[7] The federal tax advantage is the additional income servicemembers 
would have to earn if their allowances for housing and subsistence were 
subject to federal income tax. 

[8] Pub. L. No. 93-419 (Sept. 1974). 

[9] The combat zone tax exclusion allows servicemembers to exclude 
income earned--including basic pay, bonuses, special pays, and 
allowances--for each month served in a designated combat zone. 
Servicemembers who serve a minimum of 1 day in a combat zone are 
eligible to receive the combat zone exclusion for the respective month. 
Enlisted members' exclusions are not limited; however, officers can 
exclude up to the maximum earned by the highest enlisted member. 

[10] GAO, Business Modernization: NASA's Integrated Financial 
Management Program Does Not Fully Address Agency's External Reporting 
Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 2003). The Statement of 
Federal Financial Accounting Standards Number 4, Managerial Cost 
Accounting Standards, requires agencies to report the full cost of 
their programs in their general-purpose financial reports aimed at 
assisting congressional and executive decision makers in allocating 
federal resources. 

[11] Accrual funding sets aside monies for future obligations. 

[12] Floyd D. Spence National Defense Authorization Act for Fiscal Year 
2001, Pub. L. No. 106-398, Sec. 712 (Oct. 2000) 

[13] GAO, The Congress Should Act to Establish Military Compensation 
Principles, GAO/FPCD-79-11 (Washington, D.C.: May 9, 1979). 

[14] Department of Defense, Office of the Secretary of Defense, 
Military Compensation Background Papers: Compensation Elements and 
Related Manpower Cost Items, Their Purposes and Legislative 
Backgrounds, sixth ed. (Washington, D.C.: April 2005). 

[15] GAO, Key Elements Needed to Successfully Transform DOD Business 
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005). 

[16] Our calculations of compensation costs include supplemental 
funding for the war on terrorism. According to DOD officials, in fscal 
year 2004 of the $158 billion over $17 billion was supplemental 
funding. 

[17] Our cost calculations capture cost to the federal government. As a 
result, we included costs assumed by other areas of government to 
compensate active duty servicemembers. These costs include the lost tax 
revenue because housing and subsistence allowances are not subject to 
federal income tax or Federal Insurance Contributions Act (FICA) tax as 
well as the estimated accrual cost of providing compensation--such as 
pension and health care--through the VA. 

[18] We adjusted for inflation using DOD's military personnel (MILPERS) 
deflator. Between fiscal years 2000 and 2004 military pay increases 
averaged over 21 percent. This compares to a 9.7 percent increase for 
fiscal years 2000 through 2004 for the all urban workers Consumer Price 
Index (CPI) and a 13.3 percent increase in the Employment Cost Index 
(ECI) for civilian wages and salaries over the same period. 

[19] GAO, Military Personnel: Higher Allowances Should Increase Use of 
Civilian Housing, but Not Retention, GAO-01-684 (Washington, D.C.: May 
31, 2001). 

[20] GAO, Defense Health Care: Observations on Proposed Benefit 
Expansion and Overcoming TRICARE Obstacles, GAO/T-HEHS/NSIAD-00-129 
(Washington, D.C.: Mar. 15, 2000). 

[21] Congressional Budget Office, Growth in Medical Spending by the 
Department of Defense (Washington, D.C.: September 2003). 

[22] In fiscal year 2003, DOD began budgeting for the accrual cost of 
health care for retirees over age 65 and their dependents. This cost is 
in the military personnel budget. However, health care for retirees 
under 65 and their dependents is not currently budgeted for on an 
accrual basis. 

[23] GAO, Military Personnel: Active Duty Benefits Reflect Changing 
Demographics, but Opportunities Exist to Improve, GAO-02-935 
(Washington, D.C.: Sept. 18, 2002). 

[24] Department of Defense, Office of the Secretary of Defense, 
Military Compensation Background Papers: Compensation Elements and 
Related Manpower Cost Items, Their Purpose and Legislative Backgrounds 
(Washington, D.C.: Sixth edition, April 2005). 

[25] John T. Warner and Saul Pleeter, "The Personal Discount Rate: 
Evidence from Military Downsizing Programs," The American Economic 
Review (March 2001). 

[26] GAO, Military Personnel: Active Duty Benefits Reflect Changing 
Demographics, but Opportunities Exist to Improve, GAO-02-935 
(Washington, D.C.: Sept. 18, 2002). 

[27] John T. Warner and Saul Pleeter, "The Personal Discount Rate: 
Evidence from Military Downsizing Programs," The American Economic 
Review (March 2001). 

[28] These percentages are based on a typical group of new entrants and 
do not include those military personnel who began their careers on 
active duty then moved to the reserves and retired from there. 

[29] Improve Base Pay Return on Investment by Increasing Employee 
Knowledge. WorldatWork, 2002. Creating an Effective e Statement: A 
Primer. Watson Wyatt World Wide 2004. 

[30] "My Pay" is a Web site maintained by DOD's Defense Financial 
Accounting Service. It provides servicemembers online access to their 
Leave and Earnings statements as well as other related compensation 
issues--such as tax deductions. 

[31] Annual earnings statements called the Personal Statement of 
Military Compensation are mailed to Army, Air Force, and Marine Corps 
servicemembers annually and provide them personalized information about 
the amount of cash pay they receive as well as general information 
about the value of their benefits. For example, servicemembers are 
provided an estimated value of their health care if they were to buy 
similar coverage in the civilian market. 

[32] GAO, Military Recruiting: DOD Needs to Establish Objectives and 
Measures to Better Evaluate Advertising's Effectiveness, GAO-03-1005 
(Washington, D.C.: Sept. 19, 2003). 

[33] In fiscal year 2000, the Secretary of Defense introduced an 
initiative to increase housing allowances so that servicemembers would 
be paying nothing out of pocket for rent and utilities by fiscal year 
2005. 

[34] The current retirement system requires servicemembers to generally 
serve 20 years before becoming eligible for nondisability retirement 
pay and benefits. 

[35] John T. Warner and Saul Pleeter, "The Personal Discount Rate: 
Evidence from Military Downsizing Programs," The American Economic 
Review (March 2001). 

[36] We asked focus group participants to identify their civilian 
counterparts and how their pay compared with the counterpart they 
identified. 

[37] Between fiscal years 2000 and 2004 military pay increases averaged 
over 21 percent. This compares favorably to the 9.7 percent increase in 
the urban workers Consumer Price Index (CPI) over the same period. 
Subtracting the 9.7 percent from the 21 percent yields the real wage 
growth of military personnel of over 11.3 percent. Compared to the 
Employment Cost Index (ECI) military wages grew over 7.7 percent more 
(21 percent minus 13.3 percent) than did civilian wages and salaries 
over the same period. 

[38] Officers were compared with civilians who have 4-year college 
degrees, while enlisted members were compared with civilians who have 
high school diplomas and some college. 

[39] The Department of Veterans Affairs offers different programs to 
active duty members such as the Montgomery GI Bill, which provides 
education assistance, and a guaranteed home loan program, which 
provides government-backed mortgages to buy homes. 

[40] NBER's TAXSIM Model simulates the U.S. federal income tax rules. 
See Daniel Feenberg and Elisabeth Coutts, "An Introduction to the 
TAXSIM Model," Journal of Policy Analysis and Management, Volume 12, 
No. 1, 1993 pp. 189-194. 

[41] In the case where servicemembers are eligible for the Earned 
Income Tax Credits (EITC), any extra income would likely result in a 
lower marginal tax rate, because of the structure of the EITC phase- 
out. 

[42] The first dependent is assumed to be a spouse. Other dependents 
are assumed to be children. 

[43] The age categories used are: 0 to 17 years old, 18 to 44 years 
old, 45 to 64 years old, and over age 65. 

[44] See Congressional Budget Office, "Growth in Medical Spending by 
the Department of Defense," appendix B (2003) for a more extensive 
discussion of this methodology. 

[45] The 2002 estimates are used for 2003 and 2004, because MEPS data 
for those years have not been released. There is no apparent trend in 
the relative use data and using an average over previous years did not 
affect the results. 

GAO's Mission: 

The Government Accountability Office, the investigative arm of 
Congress, exists to support Congress in meeting its constitutional 
responsibilities and to help improve the performance and accountability 
of the federal government for the American people. GAO examines the use 
of public funds; evaluates federal programs and policies; and provides 
analyses, recommendations, and other assistance to help Congress make 
informed oversight, policy, and funding decisions. GAO's commitment to 
good government is reflected in its core values of accountability, 
integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains 
abstracts and full-text files of current reports and testimony and an 
expanding archive of older products. The Web site features a search 
engine to help you locate documents using key words and phrases. You 
can print these documents in their entirety, including charts and other 
graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 
correspondence. GAO posts this list, known as "Today's Reports," on its 
Web site daily. The list contains links to the full-text document 
files. To have GAO e-mail this list to you every afternoon, go to 
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order 
GAO Products" heading. 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office

441 G Street NW, Room LM

Washington, D.C. 20548: 

To order by Phone: 

Voice: (202) 512-6000: 

TDD: (202) 512-2537: 

Fax: (202) 512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470: 

Public Affairs: 

Jeff Nelligan, managing director,

NelliganJ@gao.gov

(202) 512-4800

U.S. Government Accountability Office,

441 G Street NW, Room 7149

Washington, D.C. 20548: