a

GAO

United States Government Accountability Office

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

GAO-05-798
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

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. 

Highlights of GAO-05-798, a 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 

DOD’s 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 DOD’s 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.

Over the years, the Department of 

Defense’s (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 General’s 

authority, GAO (1) assessed 

whether DOD’s 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 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 GAO’s 

recommendations. 
Page i GAO-05-798 Military Compensation

Contents

Letter 1

Results in Brief 4

Background 7

DOD’s Compensation System Lacks Transparency to Identify Total 

Costs and How Compensation Is Allocated 8

Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key 

Human Capital Goals or Not Sustainable in the Long Term 14

DOD’s Lack of an Effective Communication and Education Effort on 

Compensation Has Allowed Servicemembers’ Misperceptions and 

Concerns about Their Compensation to Perpetuate 27

Conclusions 35

Recommendations for Executive Action 37

Matter for Congressional Consideration 37

Agency Comments and Our Evaluation 37

Appendixes

Appendix I: Scope and Methodology 42

Appendix II: Sample of a Personal Statement of Military Compensation 49

Appendix III: Comments from the Department of Defense 53

Appendix IV: GAO Contact and Staff Acknowledgments 56

Related GAO Products 57

Tables Table 1: Total Costs to Provide Active Duty Servicemembers 

Compensation (Source and Types) 10

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

2000 and 2004 19

Table 3: Composition of Focus Groups 46

Figures Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal 

Years 2000-2004 16

Figure 2: The Allocation of Cash, Noncash, and Deferred 

Compensation Costs per Active Duty Servicemember in 

Fiscal Year 2004 22

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

Compensation 24
Contents

Page ii GAO-05-798 Military Compensation

Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 

20-Year Career 26

Figure 5: Reasons for Servicemembers’ Dissatisfaction with Pay 

and Benefits 31

Abbreviations

DHP Defense Health Program

DOD Department of Defense

MEPS Medical Expenditures Panel Survey

VA Department of Veterans Affairs

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. However, 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.
Page 1 GAO-05-798 Military Compensation

United States Government Accountability Office

Washington, D.C. 20548

A

July 19, 2005 Letr

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.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.

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. 
Page 2 GAO-05-798 Military Compensation

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.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 

2

 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 
Page 3 GAO-05-798 Military Compensation

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.
Page 4 GAO-05-798 Military Compensation

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.3

3

 GAO, Key Elements Needed to Successfully Transform DOD Business Operations, 

GAO-05-629T (Washington, D.C.: Apr. 28, 2005).
Page 5 GAO-05-798 Military Compensation

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.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 2020.5

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 onethird 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.

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).
Page 6 GAO-05-798 Military Compensation

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.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.

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).
Page 7 GAO-05-798 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.
Page 8 GAO-05-798 Military Compensation

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 advantage7

—to describe the 

foundation of servicemembers’ cash compensation which can be used to 

compare military and civilian pay.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.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.

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. 
Page 9 GAO-05-798 Military Compensation

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.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.11 However, health care 

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. 
Page 10 GAO-05-798 Military Compensation

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 Component of compensation

DOD Military Personnel

• Contains all cash compensation received by servicemembers in their “pay check” 

while serving on active duty and some costs for benefits. 

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

• othera

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). 

• 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
Page 11 GAO-05-798 Military Compensation

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.

DOD Future Years Defense Program (FYDP)

• A planning document published by DOD;

• Contains costs for upkeep and utilities costs for on-base family housing.

• family housing upkeep and utilities

• we were unable to identify similar costs for 

barracks (on-base housing for single 

servicemembers)

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

• Montgomery GI Bill (education benefit)

• Guaranteed Home Loan program

Department of Education

• Funds provided to local school districts to offset the impact of lost tax revenue 

because of military installations. 

• funding for local school systems impacted by 

military dependents 

Department of Labor

• Program for servicemembers who are leaving the active duty force and seeking 

civilian employment.

• employment assistance

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.

• 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

(Continued From Previous Page)

Federal department’s budget and type of budget Component of compensation
Page 12 GAO-05-798 Military Compensation

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.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.

12 Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, Pub. L. 

No. 106-398, Sec. 712 (Oct. 2000) 
Page 13 GAO-05-798 Military Compensation

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.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.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 

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). 
Page 14 GAO-05-798 Military Compensation

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.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.

15 GAO, Key Elements Needed to Successfully Transform DOD Business Operations, 

GAO-05-629T (Washington, D.C.: Apr. 28, 2005).
Page 15 GAO-05-798 Military Compensation

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.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.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. 

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. 
Page 16 GAO-05-798 Military Compensation

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

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 

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 

Source: GAO analysis.

Fiscal year 2004 constant dollars in billions

Fiscal year

123

141

131

155 158

Total compensation (in billions)

End strength (in millions

Per capita cost

123

1.37

89,636

131

1.37

95,096

141

1.40

100,894

155

1.42

109,245

158

1.41

111,783

29

3

25

2000 2001 2002 2003 2004

Percentage

change

2000-2004
Page 17 GAO-05-798 Military Compensation

budget. If you considered these personnel, the average costs to provide compensation would be about 

$5,000 lower.

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.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 2005.19 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.

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).
Page 18 GAO-05-798 Military Compensation

• 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.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 

2020.21 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.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.

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. 
Page 19 GAO-05-798 Military Compensation

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

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.

2004 constant dollars in billions

Components of compensation

Fiscal year 

2000

Fiscal year 

2004

Percentage 

change

Cash 

Basic pay $38.4 $47.4 23

Housing allowance 7.3 12.0 66

Subsistence allowance 3.1 3.4 8

Special and incentive pays 3.3 4.3 30

Allowances 1.9 3.5 84

Tax advantage 5.3 6.4 22

Total cash 59.3 77.0 30

Noncash benefits

Subsistence in kind 1.2 3.5 185

Othera 10.3 10.0 (3)

Educationb .4 .7 68

Installation based benefitsc 4.4 5.2 20

Health care 8.7 9.7 11

Family housing and barracks 3.2 3.1 (1)

Total noncash 28.2 32.2 14

Deferred benefits

Retired pay accrual 12.2 12.8 5

VA compensation and pension 9.0 11.1 23

VA health care 8.4 10.3 23

VA other .9 1.1 23

Health care accrual 5.1 13.6 166

Total deferred 35.6 48.9 38

Total compensation $123.1 $158.1 29
Page 20 GAO-05-798 Military Compensation

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.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.

23 GAO, Military Personnel: Active Duty Benefits Reflect Changing Demographics, but 

Opportunities Exist to Improve, GAO-02-935 (Washington, D.C.: Sept. 18, 2002).
Page 21 GAO-05-798 Military Compensation

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.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.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.

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). 
Page 22 GAO-05-798 Military Compensation

Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation Costs per 

Active Duty Servicemember in Fiscal Year 2004

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.

49%

31%

20%

Deferred benefits:

Noncash benefits:

Cash compensation:

Source: GAO analysis.

Retired pay accrual

VA compensation and pension

VA health care

VA other 

Health care accrual

Total deferred benefits

$9,072 

7,839 

7,303 

771 

9,643 

$34,629

Basic pay

Housing allowance

Subsistence allowance

Special and incentive pays

Other allowances

Federal tax advantage

Total cash compensation

$33,502 

8,507 

2,380 

3,021 

2,441 

4,538 

$54,389

Health care

Installation-based benefits

Subsistence in kind

Family housing and barracks

Education

Other benefits

Total noncash benefits

$6,829 

3,700 

2,455 

2,221 

466 

7,093 

$22,765

Total cost to provide compensation was about $112,000 per active duty 

member benefits made up about 51 percent of this cost.
Page 23 GAO-05-798 Military Compensation

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.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.

26 GAO, Military Personnel: Active Duty Benefits Reflect Changing Demographics, but 

Opportunities Exist to Improve, GAO-02-935 (Washington, D.C.: Sept. 18, 2002). 
Page 24 GAO-05-798 Military Compensation

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

Note: Average compensation costs are in 2004 dollars.

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 lumpsum cash payment versus deferred compensation in the form of an 

annuity.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 

82%

18%

Salary/ 

wages

Benefits

Salary/ 

wages

Benefits

Source: Department of Commerce, Bureau of Economic Analysis.

Private industry - Total average costs of compensation $50,509 Civilian federal government - Total average costs of compensation $92,330

67%

33%

27 John T. Warner and Saul Pleeter, “The Personal Discount Rate: Evidence from Military 

Downsizing Programs,” The American Economic Review (March 2001).
Page 25 GAO-05-798 Military Compensation

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.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.

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. 
Page 26 GAO-05-798 Military Compensation

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

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 

0

10

20

30

40

50

60

70

80

90

100

Officer Enlisted Overall 

Source: DOD.

In percent

47

17 15
Page 27 GAO-05-798 Military Compensation

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.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.

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. 
Page 28 GAO-05-798 Military Compensation

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.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.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 

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. 
Page 29 GAO-05-798 Military Compensation

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.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,33

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. 
Page 30 GAO-05-798 Military Compensation

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.
Page 31 GAO-05-798 Military Compensation

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

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 

Source: Defense Manpower Data Center and GAO analysis. 

2002 Active Duty 

Status of Forces 

survey 

2005 results of GAO focus group discussions and 

survey of focus group participants

Percentage 

dissatisfied 

Percentage 

dissatisfied

 focus group survey

Components 

of 

compensation 

Enlisted Officers Enlisted Officers

Themes of dissatisfaction reported 

during focus groups 

N=40 

Basic pay 

52 26 59 19 

While officers were relatively satisfied with base pay, 

both officers and enlisted personnel expressed concern 

about how their pay compares to civilians and the 

inadequacy of base pay for enlisted members. 

Basic allowance for 

housing 40 39 53 40 

Servicemembers expressed much concern with the 

subsequent raises of their rent due to the recent 

increases of their housing allowance and the inequity of 

higher housing allowances for members with dependents 

compared to ones without dependents. 

Basic allowance for 

subsistence 48 42 54 56 

While servicemembers have high dissatisfaction with the 

subsistence allowance, many inaccurately thought the 

allowance covered themselves and their family. 

Special and 

incentive pays 45 31 49 34 

Overall, both enlisted personnel and officers were 

dissatisfied with special pays because they do not 

understand why some are eligible to receive pays and 

how the amounts of the pays are set. 

Servicemember 

medical/dental care 25 21 22a

14 a

Although servicemembers’ dissatisfaction rates are low, 

almost all 40 focus groups spoke extensively about their 

dissatisfaction with the poor quality of or difficulty in 

accessing their health care. 

Family medical/ 

dental care 

26 33 28 a 27 a

Enlisted personnel and officers often cited different 

reasons for dissatisfaction with family medical care, 

including not being able to maintain a rapport with one 

doctor and being unfamiliar with the billing processes for 

TRICARE. 

Commissaries and 

exchanges 19 17 25 17 

While the rate of dissatisfaction is relatively low, 

servicemembers felt the commissaries and exchanges 

have outlived their usefulness because the savings are 

relatively minor and are not as convenient for those 

members living off base. 

n=11,060 n= 401
Page 32 GAO-05-798 Military Compensation

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.

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.34

Comments like these, which we heard frequently, seem to support past 

studies indicating servicemembers have a strong preference for cash 

compensation today.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 

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).
Page 33 GAO-05-798 Military Compensation

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.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.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.

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.
Page 34 GAO-05-798 Military 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.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.

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. 
Page 35 GAO-05-798 Military Compensation

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.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 

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. 
Page 36 GAO-05-798 Military Compensation

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.
Page 37 GAO-05-798 Military Compensation

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 
Page 38 GAO-05-798 Military Compensation

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 
Page 39 GAO-05-798 Military Compensation

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 

http://www. gao.gov.
Page 40 GAO-05-798 Military Compensation

If you or your staff have any questions regarding this report, please contact 

me at (202)512-5559 (Stewartd@gao.gov). Other staff members who made 

key contributions to this report are listed in appendix IV.

Derek B. Stewart

Director, Defense Capabilities and Management
Page 41 GAO-05-798 Military Compensation

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
Page 42 GAO-05-798 Military Compensation

Appendix I

Scope and Methodology ApApenednxidexiIs

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.
Appendix I

Scope and Methodology

Page 43 GAO-05-798 Military Compensation

To estimate the total federal tax expenditure that results from the taxexempt 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.1

 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.2

 A servicemember’s 

earnings and tax status were determined by rank, years of service, and 

number of dependents.3

 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.

1

 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.

2

 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. 

3

 The first dependent is assumed to be a spouse. Other dependents are assumed to be 

children.
Appendix I

Scope and Methodology

Page 44 GAO-05-798 Military Compensation

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,4

 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.5

 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.6

 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 

4

 The age categories used are: 0 to 17 years old, 18 to 44 years old, 45 to 64 years old, and 

over age 65.

5

 See Congressional Budget Office, “Growth in Medical Spending by the Department of 

Defense,” appendix B (2003) for a more extensive discussion of this methodology.

6

 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. 
Appendix I

Scope and Methodology

Page 45 GAO-05-798 Military Compensation

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 
Appendix I

Scope and Methodology

Page 46 GAO-05-798 Military Compensation

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

Source: GAO analysis.

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.

Servicemember pay grade

Enlisted Officer

Service Location E1-E4 E5-E6 E7-E9 O1-O3 O4-O6 Total

Air Force Pope Air Force Base, North 

Carolina 1 1 1 1 1 5

Scott Air Force Base, Illinois 1 1 1 1 1 5

Army Ft. Benning, Georgia 1 1 1 1 1 5

Ft. Bliss, Texas 1 1 1 1 1 5

Navy Naval Station Norfolk, Virginia 1 1 1 1 1 5

Navy Region Southwest, 

California 1 1 1 1 1 5

Marine Corps Camp Pendleton, California 1 1 1 1 1 5

Camp Lejeune, North Carolina 1 1 1 1 1 5

Total 8 8 8 8 8 40
Appendix I

Scope and Methodology

Page 47 GAO-05-798 Military Compensation

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.
Appendix I

Scope and Methodology

Page 48 GAO-05-798 Military Compensation

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.
Page 49 GAO-05-798 Military Compensation

Appendix II

Sample of a Personal Statement of Military 

Compensation ApendxiI

PERSONAL STATEMENT OF MILITARY COMPENSATION 

This statement is intended to outline the total value of your military pay, allowances and benefits. By making your compensation more “visible,” this 

statement could be useful when applying for credit or loans (including home loans) from businesses or lending institutions. Another possible use of 

this summary is to help determine whether specific civilian employment offers would let you maintain the same standard of living you had while 

serving in the military. Start with the Total Direct Compensation on page 1, add the Federal Tax advantage from page 2, and then add any additional 

expense a civilian employer would expect you to pay for health and life insurance, retirement contributions, etc. This will tell you approximately 

what level of civilian salary you must earn in order to maintain a similar standard of living as that provided by your military take home pay. Each 

section of this statement contains an explanation. However, if you have any questions, please contact your local pay office. 

SUMMARY: A. Basic Military Compensation as of March 2005 ....................................................................$

 B. Special Pay and Bonuses .......................................................................................................$ 

 C. Expense allowances ...............................................................................................................$ 

 TOTAL DIRECT COMPENSATION ........................................................................$______________

 Added value of indirect compensation .......................................................................................$

 Added considerations/programs (Your estimate) ........................................................................$______________

 TOTAL COMPENSATION .......................................................................................$______________

The following information provides more details on the value of your personal compensation. Adding the indirect compensation and additional 

considerations to your direct compensation should provide a clearer picture of your total military compensation package. 

DIRECT COMPENSATION AS OF MARCH 2005 (NOTE 1)

A. BASIC COMPENSATION. Describes the basic elements of compensation paid to all military members. It includes Basic Pay, the value of 

living in government quarters or Basic Allowance for Housing (BAH), and the value of meals furnished or Basic Allowance for Subsistence (BAS). 

Your basic compensation is: 

Monthly Annual

Basic Pay ................................................................................................................................................................$ $ 

BAH or quarters valued at actual BAH for your location, rank and dependency status (see Note 2).....................$ $ 

BAS ........................................................................................................................................................................$ $ 

TOTAL BASIC COMPENSATION ..........................................................................................................$________ $_______ 

B. SPECIAL PAY AND BONUSES. Is in addition to Basic Compensation for people in certain skills and assignments. Your bonuses, special and 

incentive pays are: 

Special and Incentive Pays .....................................................................................................................................$ $ 

Bonuses ..................................................................................................................................................................$ $ 

 TOTAL SPECIAL PAY AND BONUSES ...............................................................................................$_______ $_______

C. EXPENSE ALLOWANCE. You may receive allowances to help compensate you for extra expenses you incur based on the location of your 

duty assignment. These include the overseas housing allowance (OHA), cost of living allowance (COLA) (Note 1) only payable in certain areas, 

family separation allowance (FSA), and clothing replacement allowance (CRA). Your total expense allowances are: 

 TOTAL EXPENSE ALLOWANCES ......................................................................................................$_______ $________

Note 1: Pay items on your March 2005 LES, marital status and dependents taken from your personnel records. Annual rates for COLA are for 365 

days, not 12 times the March rate.

Note 2: If BAH was not in effect in March 2005, we assumed you received quarters or meals worth about as much as BAH. If you received partial 

BAH, we assumed that the partial BAH and value of quarters together roughly equal full BAH. 

INDIRECT COMPENSATION

Other programs supplement your direct compensation. These have a cash value to you in terms of spendable income. They are an important part of 

your compensation and should be considered in adding up your real pay value. 

A. MEDICAL CARE. As an active duty member, the military provides you and your family with comprehensive medical care. TRICARE is the 

name of the Defense Department’s regional health care program. Under TRICARE, there are three health plan options: TRICARE Prime (all active 

duty are automatically in Prime, but family members may choose to enroll in this HMO-type plan); TRICARE Standard (an indemnity plan, formerly 

called CHAMPUS); TRICARE Extra (a Preferred Provider Organization plan). Under TRICARE Prime, you will have an assigned military or 

civilian primary care manager who will manage all aspects of your care, including referrals to specialists. Prime has no deductibles, cost-shares, or 

co-payments except a nominal co-payment for prescriptions filled at a retail pharmacy or through the National Mail Order Pharmacy program. 

TRICARE Standard offers more choice of providers, but requires an annual $150 deductible/person or $300/family (E-1 to E-4: $50/person, 

$100/family) plus a 20% cost-share for outpatient care and an $13.90/day charge for inpatient care. TRICARE Extra offers the same benefit as 

Standard, but when you elect to use a Prime network provider, the outpatient visit cost-share is only 15%. The average total premium of a civilian 

plan that would provide similar benefits to TRICARE Prime is conservatively estimated at $374.27/month/individual, $ 4,491.24/year/individual, 

$1,022.03/month/family and $ 12,264.36/year/family – these premiums do not take into consideration cost-shares and deductibles often required in 

civilian plans like the TRICARE Standard and Extra options. Please contact the Beneficiary Counseling and Assistance Coordinator at the nearest 

military treatment facility for additional information. The personal costs experienced by you or your family will vary depending on the TRICARE 

option you select. 
Appendix II

Sample of a Personal Statement of Military 

Compensation

Page 50 GAO-05-798 Military Compensation

 Monthly Rate $ ____________ Annual Rate $ ____________ 

B. DEATH AND SURVIVOR PROGRAMS. If you die on active duty, your survivors are eligible for life insurance and other payments. You may 

buy life insurance in $10,000 increments up to $250,000 at a very low cost. Also, your dependents would receive a death gratuity payment of 

$12,000 and monthly Dependency and Indemnity Compensation (DIC) payments (non-taxable) of $967 for the surviving spouse and an additional 

$241 for each surviving child. DIC is adjusted annually for inflation. More information can be found at http://www.vba.va.gov/. Also see Survivor 

Benefit Plan on page 3 of this statement. You are currently paying premiums for SGLI coverage of $_______ on yourself and $_______ on your 

spouse. 

C. FEDERAL TAX ADVANTAGE. This represents the amount of additional Federal tax you would have to pay if your quarters (BAH), and meals 

(BAS) allowances were taxed. Your tax advantage is based on 

 Monthly Rate $ ____________ Annual Rate $ ____________ 

 INDIRECT COMPENSATION (A + C) Monthly Rate $ ____________ Annual Rate $ ____________ 

RETIREMENT SYSTEM

One of the most attractive incentives of a military career is the retirement system that provides a monthly retirement income for those who serve a 

minimum of twenty years. Currently, there are three retirement plans in effect -- Final Basic Pay, High-3, and Choice of High-3 or Redux with $30K 

Career Status Bonus (CSB). A description of each follows. Information on all three plans is available at: http://www.afpc.randolph.af.mil/

Additional information on the new High-3 and Redux/$30K CSB choice is available at: http://dod.mil/militarypay/.

Plan Eligible 

(as determined 

by DIEUS) (Note 

1) 

Retired Pay Formula 

(Notes 2, 3 & 4) 

Cost-of-Living Adjustment (COLA) 

(Note 5) 

Final Basic Pay Entered service 

prior to 8 Sep 80 

2.5% times the years of service times final basic pay Full inflation protection; COLA based 

on Consumer Price Index (CPI) 

High-3 (Note 6) Entered service 

on or after 

8 Sep 80 and 

before 1 Aug 86 

2.5% times the years of service times the average of 

the highest 36 months of basic pay 

Full inflation protection; COLA based 

on Consumer Price Index (CPI) 

High-3 Choice 

----------------------OR------------------------- 

Redux/CSB Choice: Instead of retiring 

under High-3, members may choose to 

receive a $30,000 (Note 7) “Career Status 

Bonus” at 15 years of service in exchange 

for agreeing to serve to at least 20 years of 

service and then retiring under the less 

generous Redux plan. 

Entered service 

on or after 

1 Aug 86 

High-3: 2.5% times the years of service times the 

average of the highest 36 months of basic pay 

----------------------------OR----------------------------- 

*Redux/CSB option: 2.5% times the years of service, 

minus one percentage point from the product for each 

year less than 30 years, times the average of the 

highest 36 months of basic pay. At age 62, retired pay 

is recalculated without deducting the one percentage 

point for each year less than 30, which allows it to 

catch up to what it would have been without the Redux 

penalty. 

High-3: Full inflation protection; 

COLA based on Consumer Price 

Index (CPI) 

--------------------OR-------------------- 

*Redux/CSB option: Partial inflation 

protection; COLA based on Consumer 

Price Index (CPI) minus 1 percent. At 

age 62, retired pay is adjusted to 

reflect full COLA since retirement. 

Partial COLA then resumes after age 

62.

Note 1: Date initially entered uniformed service (DIEUS) refers to the fixed date the member was first enlisted, appointed, or inducted. This includes cadets at the 

Service Academies, students enrolled in a reserve component as part of the Services’ senior ROTC programs or ROTC financial assistance programs, students 

in the Uniformed Services University of the Health Sciences, participants in the Armed Forces Health Professions Scholarship program, officer candidates 

attending Officer Training School, and members in the Delayed Entry Program. 

Note 2: The maximum multiplier is 75 percent times basic pay. 

Note 3: Members should be aware that the Uniformed Services Former Spouses Protection Act allows state courts to consider military retired pay as divisible property 

in divorce settlements. The law does not direct state courts to divide retired pay; it simply permits them to do so. 

Note 4: Retired pay stops upon the death of the retiree unless he or she was enrolled in the Survivor Benefit Plan. See “Survivor Benefit Plan (SBP)” on page 3 for 

additional information on this program. 

Note 5: COLA is applied annually to retired pay. 

Note 6: High-3 is a reference to the average of the high three years or, more specifically, the high 36 months of basic pay as used in the formula. 

Note 7. Effective 28 Dec 01, members may elect one of 5 options to receive the $30K CSB: one lump sum payment of $30k; two annual payments of $15K; three 

annual payments of $10K; four annual payments of $7.5K; or five annual payments of $6K. 

(For Retirement-Eligible Personnel) If you were to retire in your present grade, your initial gross monthly retired pay would be ____________ 

increased annually for inflation. For each year you continue to stay on active duty, you will receive an additional 2.5% of your basic pay up to a 

maximum of 75%. Your retirement represents a considerable value over your life expectancy. While retired pay stops upon death, you can ensure 

your survivors receive a portion of it by enrolling in the Survivor Benefit Plan when you retire (see next page). Retired pay calculation is for 

illustration only. It does not consider any active duty service commitment or time-in-grade requirement, which may preclude your retiring 

immediately in your present grade. Further, the date used to determine years of service in your actual retired pay computation (the “1405” date) will 

be determined by the MPF from paper records and could be different than the total active Federal military service used in this example. 
Appendix II

Sample of a Personal Statement of Military 

Compensation

Page 51 GAO-05-798 Military Compensation

ADDITIONAL CONSIDERATIONS

When adding up the total worth of your compensation package, you should also consider the many other programs and privileges you have. Their 

worth will be different for each person depending on use. This page is presented for you to determine the yearly value/savings you estimate each of 

these programs has been worth to you. 

 Your Estimate of Annual 

 Value/Savings

PAY GROWTH. Pay raises each year, longevity increases, and competitive promotion opportunities. $ ____________ 

STATE/LOCAL TAX ADVANTAGE. Besides being exempt from Federal taxes, your BAH, BAS, and overseas allowances and in-kind housing 

may be exempt from State and Local taxes, depending upon the state you claim as a legal residence. Relative to the tax laws of your legal 

residence, this can save you hundreds of dollars each year. 

 $ ____________ 

COMMISSARY. Studies have found that commissary shoppers save an average of 30% or more on their grocery purchases, amounting to about 

$2,700 annually for a family of four. If you spend the following, your savings will be approximately: $ ____________ 

Monthly Grocery Purchases 

Supermarket Commissary Savings % Savings 

 $200.00 $140.00 $60.00 30% 

 $300.00 $210.00 $90.00 30% 

 $400.00 $280.00 $120.00 30% 

Find your nearest commissary through the locations link at www.commissaries.com. Take advantage of the Savings You’ve Earned! 

ARMY AND AIR FORCE EXCHANGE SERVICE (AAFES). Now in our second century of service, the Army and Air Force Exchange Service 

(AAFES) remains committed to serving you, the "best customer in the world". Your exchanges provide products and services to authorized 

customers worldwide and generate reasonable earnings to supplement appropriated funds for Army and Air Force morale, welfare, and recreation 

(MWR) programs. Earnings fund new and improved stores with most of the profits going to MWR programs - over $2 30 million last year. 

AAFES' shelf prices provide you 21.9 percent overall savings compared to off post/base retail operations. While you can enjoy your exchange benefit 

in many ways the greatest value is AAFES' pledge to "Go Where You Go." And remember, AAFES offers 24/7 convenience through its website 

'www.aafes.com'.

SURVIVOR BENEFIT PLAN (SBP). All pay stops when a member dies. However, if you die on active duty, your surviving spouse and children 

are automatically protected by the SBP--at no cost to you. The surviving spouse will get an annuity equal to the difference between the dependency 

and indemnity compensation DIC payment and the SBP payment that would be paid if you had been retired on the date of your death. To determine 

the amount of the SBP, the maximum applicable rate of retired pay that would be due you will be used. The only way retirees can guarantee their 

survivors receive a share of their retired pay is to enroll in SBP before they retire. The maximum annuity is equal to 55% of retired pay until the 

spouse attains age 62. At age 62, the annuity is reduced to 35% of retired pay unless the retiree purchases the Supplemental Survivor Benefit Plan 

(SSBP), which restores the annuity to between 40 and 55%, depending on the amount selected. The FY05 NDAA eliminated the reduction of SBP at 

age 62, with phase-in rates of 40% in 2005, 45% in 2006, 50% in 2007, and 55% in 2008. The SBP annuity for your survivor is adjusted each year 

by the same percentage increase given to military retired pay. Additional information can be found at http://www.afpc.randolph.af.mil/

 $____________ 

UNIFORMED SERVICE THRIFT SAVINGS PLAN (TSP): You can gain additional tax deferred advantages through participation in the TSP. 

You are limited in the amount of Base Pay you may contribute (below), however you may contribute up to 100% of your special, incentive, or bonus 

pay. There are also annual contribution limits that apply (below). If you perform duty in a designated combat zone, your contributions to TSP will 

be tax-exempt (versus tax deferred) and will not count against your tax deferred limits. The combination of your tax-exempt and tax deferred 

contributions are limited to $40,000 for any year. More information can be found at http://www.tsp.gov/

Year % of Base Pay Total Annual Tax Deferred Limits

*********************Delete 2004 Information****************************** 

 2005 10 $14,000 

 2006 + (unlimited) $15,000 $ ____________ 

FEDERAL LONG-TERM CARE INSURANCE PROGRAM (FLTCIP): The FLTCIP is the only long term care insurance program sponsored 

by the Federal Government. It is managed by the Office of Personnel Management and offered by two insurance leaders--John Hancock and 

MetLife. It provides comprehensive benefits to included home care, informal care, and inflation options at competitive group premiums. The 
Appendix II

Sample of a Personal Statement of Military 

Compensation

Page 52 GAO-05-798 Military Compensation

FLTCIP helps preserve your retirement savings should a long-term care need arise. Those eligible for the FLTCIP include all Federal Employees 

(Uniformed Service members), their spouses, adult children (including natural, adopted & step), parents, parents-in-law, and stepparents. 

Call 1-800-LTC-FEDS (1-800-582-3337) or visit the web site at: http://www.LTCFEDS.com $ ____________

EDUCATION PROGRAMS. Members in authorized off-duty education programs receive up to 100 percent of tuition costs, up to a maximum of 

$250.00 per credit hour, $4,500 per fiscal year, paid by the Government. Members who had established an account in the Veterans Educational 

Assistance Program (VEAP) by contributing $25-$100 each month or by lump sum payment (up to $2700), have a Government $2 for $1 matching 

contribution for a total of up to $8,100. Members who elected to participate in the Montgomery GI Bill upon entering active duty (after 30 June 

1985), and agreed to payroll reduction of $100 per month for a total of 12 months, can receive a benefit of $ $36,144 with yearly increases as 

determined by the consumer price index. $____________

SERVICES ACTIVITIES. Provide conveniently located, low-cost, professionally managed activities and entertainment. You and your family 

members receive significant savings when you participate in Services programs such as fitness, libraries, child development and youth programs, 

skills development, golf, bowling, clubs, outdoor recreation activities, equipment checkout, aero clubs, etc. $____________ 

COUNSELING AND ASSISTANCE PROGRAMS. Military members can get free personal financial management counseling, relocation services 

assistance, transition counseling, spousal employment assistance, and assistance from a wide range of other programs available from Air Force 

Family Support Centers. Air Force Aid Society provides zero interest emergency loans and grants to members who qualify (total loans and grants 

given in 2004 was $11,300,000 and 10,000,000 in community outreach and education programs). $ ____________

LEGAL COUNSELING. Military members can get free legal counseling and assistance. $_____________

Consultations with an attorney: $150.00

 Wills: $200.00 

 Notaries: $5.00 

 Advance Medical Directives: $75.00 

 Client Correspondence: $50.00 

 Powers of Attorney: $50.00 

SPACE AVAILABLE TRAVEL. Space available travel for Uniformed Services members can provide substantial savings over commercial airline 

fares. Space available travel is defined by DoD policy as a privilege (not an entitlement), which accrues to Uniformed Services members as an 

avenue of respite from the rigors of Uniformed Services duty. Under one of the categories of space available travel, members on leave can travel 

with one dependent on permissive TDY house hunting trips. For additional information on this special privilege, consult the AMC Space Available 

web page at http://public.amc.af.mil/Library/SPACEA/spacea.htm 

$ ____________ 

TRICARE DENTAL PROGRAM (TDP). TDP eligibility includes spouses and eligible children of active duty members of the Uniformed 

Services, Selected Reserve and Individual Ready Reserve. Additionally, the Selected Reserve and Individual Ready Reserve members themselves 

are eligible for the TDP. Enrollees may be treated in both CONUS and OCONUS locations. TDP monthly premiums for Selected Reserve members 

and family members of active duty are cost-shared by the Department of Defense (DoD) (i.e., the government pays 60% of the premium, sponsor 

pays 40%). The sponsor’s monthly premium payment is $9.32 for a single enrolled family member and $23.31 for families with two or more 

members enrolled. This equates to an annual savings conservatively estimated at $175 for single and $439 for family enrollments. Basic preventive, 

diagnostic and emergency services are covered at 100%; the plan pays 50%-80% of the cost for certain specialized services such as restorations, 

orthodontics, and prosthodontics. Moreover, DoD cost-shares other specialty care (periodontic, endodontic, and oral surgery) at a higher percentage 

for E-1s to E-4s.

 $ _____________

(add this amount to Summary Total on page 1) TOTAL $ _____________
Page 53 GAO-05-798 Military Compensation

Appendix III

Comments from the Department of Defense ApendxiI
Appendix III

Comments from the Department of Defense

Page 54 GAO-05-798 Military Compensation
Appendix III

Comments from the Department of Defense

Page 55 GAO-05-798 Military Compensation
Page 56 GAO-05-798 Military Compensation

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Derek Stewart, (202) 512-5559 (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.
Page 57 GAO-05-798 Military Compensation

Related GAO Products

Defense Management: Key Elements Needed to Successfully Transform 

DOD Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005.

Military Personnel: Preliminary Observations on Recruiting and 

Retention Issues within the U.S. Armed Forces. GAO-05-419T. 

Washington, D.C.: March 16, 2005.

21st Century Challenges: Reexamining the Base of the Federal 

Government. 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. 

GAO-04-1005. Washington, D.C.: September 15, 2004.

Military Personnel: Survivor Benefits for Servicemembers and Federal, 

State, and City Government Employees. 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. GAO-04-805. Washington, D.C.: June 25, 2004.

Military Personnel: Active Duty Compensation and Its Tax Treatment. 

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. 

GAO-04-582T. Washington, D.C.: March 24, 2004.

Military Personnel: Bankruptcy Filings among Active Duty Service 

Members. 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. 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. GAO-03-554. Washington, D.C.: April 29, 2003.
Page 58 GAO-05-798 Military Compensation

Military and Veterans’ Benefits: Observations on the Concurrent Receipt 

of Military Retirement and VA Disability Compensation. GAO-03-575T. 

Washington, D.C.: March 27, 2003.

Military Personnel: Management and Oversight of Selective Reenlistment 

Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: 

November 25, 2002.

Military Personnel: Active Duty Benefits Reflect Changing 

Demographics, but Opportunities Exist to Improve. GAO-02-935. 

Washington, D.C.: September 18, 2002.

Military Personnel: Higher Allowances Should Increase Use of Civilian 

Housing, but Not Retention. GAO-01-684. Washington, D.C.: May 31, 2001.

Defense Health Care: Observations on Proposed Benefit Expansion and 

Overcoming TRICARE Obstacles. 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. GAO/T-NSIAD-00-110. Washington, D.C.: March 8, 2000.

The Congress Should Act to Establish Military Compensation Principles. 

GAO/FPCD-79-11. Washington, D.C.: May 9, 1979.

(350563)
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

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 GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To 

have GAO e-mail you a list of newly posted products every afternoon, go to 

www.gao.gov and select “Subscribe to Updates.”

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

Congressional 

Relations

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548

Public Affairs Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548