CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Costs of 

Military Pay and 

Benefits in the 

Defense Budget

NOVEMBER 2012
CBO

Notes

Unless otherwise indicated, all years referred to in this study are federal fiscal years (which run 

from October 1 to September 30).

Numbers in the text and tables may not add up to totals because of rounding.

On the cover: A member of the U.S. Marine Corps in Afghanistan records information before 

disbursing pay (photo by U.S. Marine Corps Lance Corporal Khoa Pelczar).

On pages 3 and 22, CBO’s estimate of the cumulative decline in military basic pay (under the 

Department of Defense’s plan for the 2013—2017 period) relative to projected growth in the 

employment cost index has been revised from what was published originally to correct an 

error in calculation.

Pub. No. 4234
Contents

CBO

Summary 1

Introduction 5

Defining Military Compensation: The Service Member’s Perspective 5

Defining Military Compensation: The Budgetary Perspective 6

BOX: SUBSIDIZED GOODS AND IN-KIND COMPENSATION 9

Military Compensation in the Context of the Defense Budget 9

DoD’s Compensation Plans and Funding Under Current Law 9

BOX: BENEFITS PROVIDED BY THE DEPARTMENT OF VETERANS AFFAIRS 10

BOX: PROJECTIONS OF DEFENSE APPROPRIATIONS UNDER THE BUDGET CONTROL ACT 12

Two Scenarios for Military Compensation 14

Current Cash Compensation 16

Elements of Cash Compensation 17

How Cash Compensation Has Evolved Over Time 18

Military and Civilian Compensation Compared 20

Projected Costs of Cash Compensation 20

Controlling the Costs of Cash Compensation 22

Military Retirement Benefits 22

Alternative Retirement Plans 23

Other Features of Military Retirement 24

Projected Costs of Military Retirement 27

Controlling the Costs of Military Retirement 27

The Military Health Care System 28

TRICARE 28

BOX: INCREMENTAL HEALTH CARE COSTS RELATED TO COMBAT 30

Projected Costs of the Military Health Care System 32

Controlling the Costs of Military Health Care 35

Appendix A: Enhancements to the Military Retirement System Enacted Since 2000 37

Appendix B: Accrual Accounting for the Military Retirement System 39

Appendix C: Legislative History of Cost-Sharing in TRICARE 41

Appendix D: Were Military Personnel Promised Low-Cost Health Care in Retirement? 43

List of Tables and Figures 45

About This Document 46
CBO

Summary

Compensation of military personnel takes up a 

substantial portion of the nation’s defense budget. In its 

fiscal year 2013 budget request, for example, the Department of Defense (DoD) requested about $150 billion to 

fund the pay and benefits of current and retired members 

of the armed services. As in most recent years, that 

amount was more than one-quarter of DoD’s total base 

budget request (the request for all funding other than for 

military operations in Iraq and Afghanistan and for 

related activities—often called overseas contingency operations). The compensation request involved four major 

areas: 

 Current cash compensation for service members, 

consisting of basic pay, food and housing allowances, 

bonuses, and various types of special pay; 

 Accrual payments that account for the future cash 

compensation of current service members in the form 

of pensions for those who will retire from the military 

(generally after at least 20 years of service);

 Accrual payments that account for the future costs 

of health care for current service members (under a 

program called TRICARE for Life) who will retire 

from the military and also become eligible for 

Medicare (generally at age 65); and

 Funding for current spending under the military 

health care program (known as TRICARE), excluding 

the costs of caring for current military retirees who 

also are eligible for Medicare (the latter costs are 

covered by the accrual payments made in earlier years, 

just described).

In all, about 1.4 million active-duty military personnel 

and about 1.1 million members of the reserves and 

National Guard receive current cash compensation, the 

largest part of compensation in DoD’s budget. Cash 

compensation for members of the reserves and National 

Guard goes mainly to the 840,000 members of the 

Selected Reserve—service members who are assigned to 

and train regularly with standing units. Second in total 

cost to current cash compensation, military health benefits are available to nearly 10 million people: active-duty 

military personnel and their eligible family members, 

retired military personnel and their eligible family members, survivors of service members who died while on 

active duty, and certain members of the reserves and 

National Guard.

This report does not consider the costs of the benefits 

provided by the Department of Veterans Affairs (VA)—

about $130 billion in that department’s 2013 budget 

request. Those benefits include health care for veterans 

with service-connected disabilities and for veterans who 

meet certain other eligibility criteria. Other VA benefits 

include monthly cash payments that compensate for 

service-connected disabilities and GI Bill benefits that 

reimburse some of the costs of higher education.

This report also does not consider the costs of pay and 

benefits for DoD’s roughly 790,000 full-time-equivalent 

civilian employees, other than for the 60,000 who are 

assigned to the military health care system and whose 

compensation contributes to the estimate of the total cost 

of delivering military health care.

Projected Costs

Over the past decade, the costs per active-duty service 

member that are funded through DoD’s military personnel account (which funds current cash compensation and 

the accrual payments for retirees’ pensions and some of 

their health care) and the total costs for the military 

health care program have increased consistently, even 

with an adjustment for inflation in the general economy 

(see Summary Figure 1). The trend in the military personnel account is attributable primarily to a series of pay 

raises that exceeded the general rate of inflation and, in 

some years, the growth rate of private-sector wages and 

salaries. 
2 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Summary Figure 1.

Funding for Military Compensation

Source: Congressional Budget Office based on data contained in Long-Term Implications of the 2013 Future Years Defense Program

(July 2012). 

Note: Excludes funding for overseas contingency operations.

a. Active-duty service members are counted as of the final day (September 30) of each fiscal year.

b. The TRICARE for Life (TFL) program began in 2002 but was not funded on an accrual basis until 2003.

Before 2001, pharmaceutical costs were not separately identifiable but were included in the costs of two categories: Purchased Care and 

Contracts and Direct Care and Administration. An initiative to separately identify pharmaceutical costs began in 2001, and since 2002, 

most pharmaceutical costs have been so identified. However, some of those costs incurred since 2003 have been included in the 

category TFL Accrual Payments.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

20

40

60

80

100

120

Military Personnel Appropriation per Active-Duty Service Membera

(Thousands of 2013 dollars)

(Billions of 2013 dollars)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

20

40

60

Pharmaceuticals

Purchased Care and Contracts

Direct Care and Administration

TFL Accrual Payments

Funding for the Military Health Care System, by Categoryb

Military Personnel
SUMMARY COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 3

CBO

In particular, the annual changes in basic military pay—

the largest and most visible part of cash compensation—

have since 2000 been linked to changes in the Bureau of 

Labor Statistics’ employment cost index (ECI) for wages 

and salaries in private industry. The ECI historically has 

increased faster than prices, which are measured here 

using the deflator for gross domestic product (GDP). 

Moreover, in 2008, 2009, and 2010, lawmakers authorized military pay raises that were 0.5 percentage points 

above the increase in the ECI. Also at work in pushing up 

compensation costs were several enhancements to pension and health benefits for retired military personnel and 

medical costs per beneficiary that escalated more rapidly 

than did either general inflation or increases in per capita 

costs for medical care in the national economy.

DoD’s plans, as reflected in the 2013 Future Years 

Defense Program (FYDP) submitted to the Congress in 

April 2012, do not include military pay raises that keep 

pace with the ECI from 2013 through 2017. Instead, 

the department’s plans include a 1.7 percent pay raise 

for 2013. For 2014, DoD again proposes a raise of 

1.7 percent, which is below the amount projected by the 

Congressional Budget Office (CBO) for the increase in 

the ECI for that year but is perhaps consistent with 

DoD’s own projection of the ECI. For 2015 through 

2017, DoD is proposing pay raises of 0.5 percent, 

1.0 percent, and 1.5 percent, respectively—all smaller 

than the department’s projection of ECI growth for those 

years. With those raises, basic pay would remain essentially flat in real (inflation-adjusted) terms (relative to the 

GDP deflator) between 2013 and 2017, and it would 

lose a total of 11 percentage points of growth relative to 

CBO’s projection of the ECI for that period.

On the basis of DoD’s 2013 FYDP, CBO projected that 

the costs of military health care that are funded by the 

accounts for military personnel and for operation and 

maintenance would rise from $51 billion in 2013 to 

$65 billion by 2017 and to $77 billion by 2022 (all measured in 2013 dollars).1

 Real growth in health care costs 

over the decade would average 4.6 percent per year, 

according to CBO’s projections.

DoD’s fiscal situation has changed as a result of the enactment of the Budget Control Act of 2011 (BCA, Public 

Law 112-25). To comply with that act, the Consolidated 

Appropriations Act, 2012 (P.L. 112-74), provided 

$530 billion for DoD’s base budget—about $24 billion, 

or 4 percent, less than the department requested. CBO 

estimates that funding for fiscal year 2013 could drop to 

$469 billion—a cut of an additional 12 percent—if all of 

the BCA’s provisions, including sequestration (the automatic cancellation of a portion of budgetary resources), 

remain in force. Even if the defense budget was cut by 

that amount, however, the costs of military compensation 

probably would not decline by the same percentage. 

Unless current law is changed, basic pay will continue to 

be linked to the ECI, and military health care costs will 

continue to grow rapidly. Thus, to comply with the BCA, 

DoD might have to take such steps as reducing the 

number of military personnel or cutting elements of 

compensation that are not automatically linked to the 

ECI or to other external economic indicators.

Controlling Costs

Several approaches could be taken to curtail spending on 

military compensation. One possibility would be to 

restrict basic pay raises, as DoD has proposed for 2015 

through 2017. Although smaller raises could lead to 

fewer enlistments and faster attrition from the armed services, those consequences might be mitigated by increasing the availability of enlistment bonuses and selective 

reenlistment bonuses (the latter are offered to service 

members in hard-to-fill occupations). Reenlistment 

bonuses can be a useful tool for increasing retention while 

curbing costs because, in contrast to basic pay raises, they 

do not compound from year to year and they have no 

effect on the value of future retirement annuities.

Another approach to controlling compensation costs 

might be to replace the current retirement system (under 

which active-duty members qualify for immediate benefits after 20 years of service) with a defined-benefit system 

that partially vests earlier in a member’s career or with a 

defined-contribution system under which DoD matches 

the service members’ contributions to a savings plan or 

with some combination of the two systems. Those measures could cost less or more than the current system, 

depending on their structure and implementation. Any 

reductions in overall federal outlays stemming from new 

rules would be delayed for 20 years if all current service 

members remained in the current system. However, DoD 

could immediately begin to spend less on the accrual payments it makes to the Military Retirement Fund if the 

defined-benefit plan became, on balance, less generous.

1. See Congressional Budget Office, Long-Term Implications of the 

2013 Future Years Defense Program (July 2012). 
4 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Still another way to control compensation costs would be 

to increase health care enrollment fees, deductibles, or 

copayments. Higher enrollment fees raise collections by 

DoD and could discourage some retiree families from 

relying on DoD to provide their health care (thus generating further savings); higher deductibles and copayments 

also act to restrain the use of medical services and thereby 

reduce the government’s cost. As an example, in the 

past CBO has examined an option that would preclude 

military retirees who are not yet eligible for Medicare 

from enrolling their families in TRICARE Prime (the 

TRICARE option that operates like a health maintenance 

organization), allowing them instead to pay to enroll in a 

plan that would provide access to a combination of network providers (similar to a preferred provider organization) and non-network providers (similar to a fee-for-service plan). CBO estimated that such an option could save 

the government as much as $10 billion per year.2

2. See Congressional Budget Office, Reducing the Deficit: Spending 

and Revenue Options (March 2011), pp. 80–81.
CBO

Costs of Military Pay and Benefits in the 

Defense Budget

Introduction

The basic pay that all military service members receive is 

the largest and most visible component of military compensation, and, in many recent years, annual adjustments 

in basic pay have been a source of contention between the 

Administration and the Congress. Despite that, however, 

basic pay accounts for only about one-third of all military 

compensation. The Department of Defense (DoD) relies 

on a complex system of current and deferred, cash and 

noncash compensation to attract and retain service members (see Table 1). In some areas, DoD has considerable 

flexibility to adjust compensation in what it deems the 

most effective way to attract and retain service members; 

in other areas, current law limits that flexibility. In all 

cases, current law provides the authority for DoD to 

structure its compensation system.

To aid the Congress in its consideration of the military 

compensation system, this study examines a range of 

issues from two perspectives: that of the service members 

and retirees who are compensated by the system and that 

of the DoD budget. Each point of view is important for 

elucidating the way the compensation system is operated, 

how much it costs, and how it affects those who receive 

the compensation.

Defining Military Compensation: 

The Service Member’s Perspective

DoD measures the largest elements of current cash compensation that all service members regularly receive by 

means of a construct called regular military compensation 

(RMC): basic pay plus allowances for subsistence (food) 

and housing and an estimate of the financial advantage 

that arises because those allowances are not subject to 

federal income taxes.

The basic pay component varies with a member’s pay 

grade and years of service. Subsistence allowances are paid 

at one monthly rate for enlisted personnel and another 

for officers, and housing allowances depend not just on 

pay grade but also on location and whether a member has 

dependents. Thus, in calendar year 2012, an enlisted 

member in the fourth-most-junior pay grade (E-4 or, 

in the Army, corporal) with between 48 months and 

72 months of service earns annual basic pay of $27,200 

and a subsistence allowance of $4,180. Housing allowances vary considerably by location, but the average for a 

member with dependents stationed in the continental 

United States is $14,820.1

 With an estimated tax advantage of $4,660, that service member’s RMC for the year 

comes to $50,860. An officer in the third-most-junior 

rank (an Army captain or a Navy lieutenant with a pay 

grade of O-3) with six years of service and at least one 

dependent earns basic pay of $63,260; the current RMC 

for that service member is $92,220.2

In addition to RMC, some service members receive other 

forms of current cash compensation at various points or, 

in some cases, throughout their careers:

 Enlistment, reenlistment, and officer accession and 

retention bonuses;

 Special or incentive pay for service members (such as 

physicians, nuclear-qualified technicians, and aviators) 

who acquire or retain critical skills or for those who 

improve proficiency (such as doctors who achieve 

board certification or aviators who log additional 

operational flying time); and

1. DoD specifies notional housing profiles for various combinations 

of pay grade and dependency status—for example, for a onebedroom apartment for an E-4 without dependents or for a 

two-bedroom townhouse for an E-5 with dependents. See Department of Defense, A Primer on Basic Allowance for Housing (BAH) 

For the Uniformed Services, 2011 (January 2011), http://

go.usa.gov/y0Q. 

2. For an online calculator, see Department of Defense, “Regular 

Military Compensation (RMC) Calculator” (accessed 

November 8, 2012), http://go.usa.gov/y0P. 
6 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Table 1.

Types of Military Compensation 

Source: Congressional Budget Office.

a. The items shown are the major categories of noncash 

compensation.

 Pay for accepting difficult or dangerous assignments, 

such as assignment incentive pay, special duty pay, 

hostile fire or imminent danger pay, and family 

separation allowances.

For fiscal year 2013, DoD requested $51 billion for basic 

pay and $7 billion for all of those forms of special and 

incentive pay.

Current noncash compensation includes benefits that service members can use immediately, including health care 

for themselves and their eligible family members, subsidies for groceries and consumer goods sold at military 

commissaries and exchanges, use of recreation centers, 

and subsidized child care. 

Deferred compensation includes both cash compensation 

in the form of military retirement annuities and noncash 

benefits such as health care for retirees and their eligible 

family members and continued access to the commissaries and exchanges. Other deferred benefits, funded 

through the Department of Veterans Affairs (VA) rather 

than through DoD, include access to health care and 

other benefits such as monthly cash payments for serviceconnected disabilities and GI Bill benefits that reimburse 

some of the costs of higher education.

Current noncash and deferred compensation is more 

difficult to measure than is current cash compensation, 

but at least three measurement concepts are of potential 

interest:

 The costs borne by DoD (and possibly other federal 

agencies) to provide a given benefit;

 The value of the benefit as perceived by service members, conceptually measured as the amount of current 

cash compensation a service member would be willing 

to accept in lieu of the benefit; or

 The savings to a beneficiary, conceptually measured as 

what the beneficiary would spend (for example, on 

out-of-pocket charges for health care) if the goods or 

services were not provided by the military.3

This report focuses on the first of those three concepts—

the costs borne by DoD.4

Defining Military Compensation: 

The Budgetary Perspective

About 1.4 million people serve on active duty in the 

military, and another 1.1 million are in the reserves and 

National Guard. Compensation costs for the latter two 

groups are principally for the 840,000 members of the 

Selected Reserve, who are assigned to and regularly train 

Cash Noncasha

Current

• Basic pay

• Housing allowance

• Subsistence (Food) 

allowance

• Bonuses and special 

pay

• Health care for service member 

and family

• Subsidized groceries at 

commissaries

• Subsidized consumer goods at 

exchanges

• Subsidized child care

• Fitness and recreation centers

• Deployment support programs 

for military families

Deferred

• Military retirement 

pay (Pension)

• Health care for retired service 

member and family

• Subsidized groceries at 

commissaries

• Subsidized consumer goods at 

exchanges

3. The third approach—measuring the savings to the beneficiary—

was presented in James E. Grefer, Comparing Military and Civilian 

Compensation Packages (Center for Naval Analyses, March 2008), 

www.cna.org/research/2008/comparing-military-civilian

-compensation-packages. That paper was published in support of 

another publication; see Department of Defense, Report of the 

Tenth Quadrennial Review of Military Compensation, vol. 2, 

Deferred and Noncash Compensation (July 2008), 

http://go.usa.gov/y0s.

4. This perspective is in keeping with some earlier work of the 

Congressional Budget Office. See the statement of Carla Tighe 

Murray, Senior Analyst, Congressional Budget Office, before 

the Subcommittee on Personnel, Senate Committee on Armed 

Services, Evaluating Military Compensation (April 28, 2010); and 

Congressional Budget Office, letter to the Honorable Steny H. 

Hoyer concerning an analysis of federal civilian and military 

compensation (January 20, 2011).
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 7

CBO

Table 2.

DoD’s Funding Request for 

Military Compensation, 2013

Source: Congressional Budget Office.

Notes: All entries are for the base budget only and exclude 

additional funding requested for overseas contingency 

operations. 

DoD = Department of Defense; MERHCF = MedicareEligible Retiree Health Care Fund; OCO = overseas 

contingency operations.

a. CBO transferred into the base budget the personnel costs for the 

41,000 soldiers and 15,000 marines on active duty whom DoD is 

planning to pay from the OCO budget.

b. Excludes $4.6 billion for permanent change-of-station travel and 

$18.8 billion for other activities requested in the military 

personnel appropriation.

c. Excludes $8.2 billion in the military personnel appropriation 

for the pay and allowances of 86,000 military medical personnel 

who provide health care at military treatment facilities; that 

amount is included in the subtotal for the military personnel 

appropriation.

d. Excludes $0.5 billion for procurement and $0.7 billion for 

research, development, test, and evaluation in the budget 

request for the Defense Health Program.

with standing units. In all, nearly 10 million people are 

eligible for health care benefits provided through 

TRICARE (the military health care program) and 

TRICARE for Life (TFL, the supplementary health 

care program for retired service members and their 

dependents who also are eligible for Medicare). Those 

beneficiaries include all active-duty service members and 

their eligible family members, retired military personnel 

and their eligible family members, survivors of service 

members who died while on active duty, and certain 

members of the reserves and National Guard.

Researchers, policymakers, and others define military 

compensation in various ways, and no single definition is 

universally accepted. The Congressional Budget Office 

(CBO) developed the definitions used in this study with 

reference to the organization of DoD’s budget, which is 

divided generally into six large categories: military personnel (MILPERS); operation and maintenance (O&M); 

research, development, test, and evaluation (RDT&E); 

procurement; military construction; and family housing. 

This study defines funding for military compensation as 

the sum of four parts:

 The MILPERS appropriation for pay, bonuses, and 

allowances;

 Accrual payments into the Military Retirement Fund, 

which account for future cash compensation in the 

form of pensions for the subset of current service 

members who eventually will retire from the military 

(generally after at least 20 years of service);

 Accrual payments into the Medicare-Eligible Retiree 

Health Care Fund (MERHCF), which account for the 

future costs of health care (under TFL) for the subset 

of current service members who eventually will retire 

from the military and also become eligible for Medicare (generally at age 65); and

 Funding from the O&M appropriation for 

TRICARE, excluding the costs of caring for current 

military retirees who also are eligible for Medicare 

(the latter costs are financed by outlays from the 

MERHCF, as described above). 

Under the assumptions and definitions CBO has adopted 

for this report, DoD’s 2013 request for military compensation was $149 billion, or 28 percent of its total base 

budget request of $526 billion (see Table 2).

The largest share of military compensation comes from 

the MILPERS appropriation. Other activities that CBO 

classifies as compensation are funded from other appropriations. In particular, the O&M appropriation provides 

Billions of

Dollars

Military Personnel Appropriation

Basic pay 51.2

Other pay and allowances 37.5

Accrual payments into the Military Retirement Fund 16.4

Accrual payments into the MERHCF 6.7

Transfer of personnel costs from the OCO budgeta 5.3 _____

Subtotalb 117.0

Defense Health Program, Operation and Maintenance 

Appropriation

Direct care at military medical treatment facilities

and administrative costsc 14.1

Purchased care and contracts 14.2

Pharmaceuticals 3.8 ____

Subtotald 32.0

Total 149.0
8 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

significant funding for military health care, with smaller 

amounts for health care coming from the procurement 

and RDT&E accounts.

The MILPERS appropriation contains the funds for basic 

military pay, subsistence and housing allowances, all of 

the various types of special and incentive pay, bonuses, 

and the government’s share (as the employer) of the social 

insurance taxes that fund Social Security and Medicare 

benefits. Some funds from the MILPERS appropriation 

are used to make accrual payments to account for the 

future pension costs for the current active-duty population; DoD estimates those payments at roughly one-third 

the value of active-duty basic pay. However, CBO 

excludes from its definition of military compensation the 

funds contained in the MILPERS account that pay moving expenses for service members and their families who 

relocate to new duty stations (about 3 percent of that 

account) and other costs that are borne by DoD but not 

reflected in service members’ paychecks (for example, the 

costs of apprehending military deserters). Taking all of 

those elements of compensation together, the requested 

MILPERS appropriation for 2013 includes $117 billion 

for military compensation (see Table 2). 

Another $32 billion that CBO classifies as military compensation was requested through the O&M appropriation.That part of the O&M budget supports the Defense 

Health Program.5

 Specifically, those funds support direct 

care at military medical treatment facilities and administrative costs, purchased health care and contracts for such 

care, and pharmaceuticals. The $8.2 billion cost of the 

pay and allowances for the 86,000 military personnel 

whom DoD plans to assign to the military health care 

system is included in the MILPERS appropriation. 

In 2013, DoD also budgeted $74 billion for the pay and 

benefits of about 790,000 full-time-equivalent civilian 

employees, mostly from the O&M appropriation but 

with smaller amounts coming from procurement and 

RDT&E funds. CBO does not consider those costs in 

this analysis of military compensation, except implicitly 

for the 60,000 civilian employees who are assigned to the 

military health care system and whose compensation is 

included in the O&M cost of delivering military health 

care.

The definition of military compensation used in this 

report accounts for most, but not all, of the costs of 

military compensation in DoD’s budget. It excludes 

such noncash benefits as fitness and recreation centers, 

subsidized child care, and subsidies for groceries sold at 

military commissaries; CBO’s definition also excludes 

deployment support programs that provide various 

types of assistance to military families. (For additional 

discussion of noncash benefits, see Box 1.) 

The definition of military compensation used in this 

report also greatly understates the total amount that the 

federal government pays for current and former military 

personnel. The discussion here is restricted to DoD’s 

budget and excludes VA benefits (see Box 2 on page 10). 

VA’s funding request for 2013 includes $56 billion for its 

medical program and $76 billion for its other programs.6

The total of $132 billion is nearly 90 percent of the 

amount ($149 billion) for military compensation that 

CBO identified in DoD’s request for the same year. In 

addition, the definition of compensation used here 

excludes the tax revenues lost to the U.S. Treasury 

because subsistence and housing allowances are exempt 

from the federal income tax, as are many types of pay and 

bonuses if earned in a combat zone. Finally, because of 

the emphasis on DoD’s budget, CBO’s definition of military compensation also excludes accrual payments that 

the Treasury (not DoD) makes to fund “concurrent 

receipt”—the ability of some retired military personnel 

to receive military retirement pay without any offset for 

the VA compensation they receive for service-connected 

disabilities.7

5. The Defense Health Program is the collection of program 

elements in DoD’s Future Years Defense Program that funds 

the health care activities of TRICARE, the military health care 

program.

6. Department of Veterans Affairs, Annual Budget Submission 

(FY 2013) (February 2012), http://go.usa.gov/YPDj.

7. For alternative definitions of military compensation—also from 

the budgetary perspective—see Maren Leed, Keeping Faith: 

Charting a Sustainable Path for Military Compensation (Center 

for Strategic and International Studies, October 2011), 

http://csis.org/files/publication/111118_Leed_KeepingFaith

_WebS.pdf; and Todd Harrison, Analysis of the FY 2012 Defense 

Budget (Center for Strategic and Budgetary Assessments, July 

2011), www.csbaonline.org/search/?x=0&y=0&q=Analysis+of

+the+Fy+2012+Budget.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 9

CBO

Military Compensation in the 

Context of the Defense Budget

The funding caps in the Budget Control Act of 2011 

(BCA, Public Law 112-25) require significant cuts in 

DoD’s budget relative to the budgetary plan expressed in 

the department’s 2013 Future Years Defense Program 

(FYDP). If, as in the past, DoD continues to receive 

95.5 percent of all funding in budget function 050 

(national defense)—and before considering the additional reductions in funding caps that would stem from 

the BCA’s automatic enforcement procedures—the 

department’s base budget (net of funding for overseas 

contingency operations, or OCO) will decline by a total 

of $22 billion (in nominal dollars) relative to its five-year 

plan for 2013–2017. If, further, the automatic enforcement procedures are triggered in January 2013, DoD’s 

base budget will drop by $52 billion more per year, CBO 

estimates, bringing the five-year cuts to a total of 

$282 billion, or 10 percent of the amount in DoD’s 

plan. By 2021—the final year explicitly addressed by the 

BCA—the reduced cap on DoD’s budget would be 

15 percent lower than the real (inflation-adjusted) 

amount appropriated for 2012. (Box 3 on page 12 gives 

estimates of the trajectory for the defense budget under 

the terms of the BCA.) The scheduled reductions will be 

extremely difficult to achieve without reducing the number of military personnel, curtailing their pay and benefits, or undertaking some combination of those two 

actions.

DoD’s Compensation Plans and 

Funding Under Current Law

DoD’s 2013 FYDP contained a plan to decrease activeduty end strength (the number of military service 

personnel on the rolls as of the final day of a fiscal year) 

by 72,000, or about 5 percent, over five years—from 

Box 1.

Subsidized Goods and In-Kind Compensation

The availability of noncash benefits—free health care 

and subsidized child care, for example—increases the 

attractiveness of military service as a career path. And 

the similarity from one base to another, even in 

remote locations or overseas, of goods and services to 

be found at commissaries, exchanges, and recreation 

facilities reduces costs and can temper the difficulty 

of changing schools, finding places to shop, and 

acquiring housing as service members move from 

place to place.

Some costs of noncash benefits are easy to estimate, 

such as the $1.4 billion annual appropriation to the 

Defense Commissary Agency that covers a portion of 

the agency’s operating costs and, in effect, subsidizes 

its food sales. For other elements of compensation, 

such as access to fitness centers, it is conceptually 

difficult to separate a personal benefit—in this case, 

recreation—from the institutional benefit of promoting service members’ readiness to perform a mission. 

Other types of compensation, such as on-base parking, although undoubtedly valued by service members, are not accounted for separately in budget documents. For this study, rather than including only the 

subset of those benefits for which costs are most easily 

estimated, the Congressional Budget Office simply 

excluded all noncash benefits other than health care.

Some observers assert that a shift from paying service 

members in the form of subsidies and in-kind benefits toward providing more cash compensation would 

allow individual service members to purchase the 

goods and services they value most and help the 

department to retain service members for a longer 

term at a lower total cost.1

 Moreover, because twothirds of active-duty service members live off-base, as 

do all nonactivated reservists, on-base facilities may 

not serve those members as effectively as a more cashbased system might. Finally, it could be simpler for 

the department to direct cash incentives to the service 

members who are most productive or whose skills are 

of greatest value to the military for the long term.

1. Carla Tighe Murray, “Transforming In-Kind Compensation 

and Benefits,” in Cindy Williams, ed. Filling the Ranks: 

Transforming the U.S. Military Personnel System (MIT Press, 

2004).
10 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Continued

1,392,000 in 2013 to 1,320,000 by 2017. To comply 

with the BCA’s funding caps (before automatic enforcement procedures take effect), DoD’s plan shifted the 

personnel costs for 41,000 soldiers and 15,000 marines 

on active duty from the base budget to the OCO budget 

in 2013 and made similar but smaller shifts for 2014 

through 2016. Those changes effectively compress the 

number of military personnel paid out of the base budget 

and accelerate the apparent savings from the planned 

reduction in end strength. In its analysis of the FYDP, 

CBO estimated the personnel costs of the service members paid from the OCO budget and transferred those 

costs back to the base budget (see Table 2 on page 7).8

Box 2.

Benefits Provided by the Department of Veterans Affairs

The Department of Veterans Affairs (VA) offers a 

variety of benefits to veterans of military service. 

The Veterans Health Administration (VHA) is 

responsible for health care. Many other benefits—

such as disability compensation (for veterans who 

incur service-connected disabilities); pensions (for 

wartime veterans with low income who are at least 

age 65 or, if younger, who are permanently and 

totally disabled because of nonservice injuries or 

medical conditions); life insurance; home loan subsidies; educational assistance; and educational and 

vocational counseling—are provided by the Veterans 

Benefits Administration (VBA). The National Cemetery Administration provides veterans with burial and 

memorial benefits.

VA’s budget request for 2013 included $76 billion for 

the mandatory programs administered by VBA.1

The remainder of VA’s budget authority consisted of 

discretionary funding plus the authority to spend 

from the Medical Care Collection Fund (MCCF), 

which collects copayments from veterans for 

inpatient and outpatient care and for pharmaceuticals 

and collects third-party payments from veterans’ 

insurance companies. VA requested $56 billion for 

medical programs and associated medical research 

and support, including $3 billion from the MCCF. 

Finally, adding $260 million for the National Cemetery Administration and $7 billion for department 

administration brings the entire 2013 budget request 

to $140 billion. (Neither the Department of Defense 

nor VA makes any accrual payments to account for 

future benefits that VA will provide to current service 

members when they separate or to current veterans as 

they age.)

Although eligibility criteria vary among VA’s categories of benefits, all are contingent on the veteran’s 

character of discharge. The military services determine whether a service member receives an honorable 

discharge, a general discharge under honorable conditions, a discharge under other than honorable 

conditions, or a bad conduct discharge. VA has developed a complex set of rules that implement the Code 

of Federal Regulations and determine whether a 

veteran’s service record qualifies the veteran for particular VA benefits.2

 Veterans with honorable or 

general discharges are eligible for most VA benefits, 

although there are some exceptions. Veterans who are 

discharged under other-than-honorable conditions 

(but not bad conduct) are eligible for health care and 

related benefits for any disability incurred or aggravated in the line of duty during active service. Only 

veterans who receive an honorable discharge are eligible for educational assistance under the Post-9/11 

GI-Bill.3

1. Spending for mandatory programs is determined through 

eligibility rules and other parameters in authorizing legislation rather than by appropriation of specific amounts each 

year. Funding for discretionary programs is provided in 

annual appropriation acts. 

2. Department of Veterans Affairs, M21-1MR, Compensation 

and Pension Manual Rewrite: Veterans Benefits Administration 

References, Part 3, Subpart v, Chapter 1, Section B (updated 

March 7, 2006), http://go.usa.gov/yms.

3. Department of Veterans Affairs, “The Post-9/11 GI-Bill” 

(July 24, 2012), http://go.usa.gov/ym6.

8. See Congressional Budget Office, Long-Term Implications of the 

2013 Future Years Defense Program (July 2012). 
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 11

CBO

Box 2. Continued

Benefits Provided by the Department of Veterans Affairs

Eligibility for health care from VHA also depends 

on other considerations. Generally, veterans of the 

active components of the military must have served 

24 continuous months on active duty; reservists and 

National Guard members may be eligible if they are 

called to active duty under a federal order and they 

complete that service. Those broad criteria, however, 

do not necessarily guarantee access to medical treatment. VHA operates an enrollment system that 

assigns each beneficiary to one of eight categories to 

establish priority for using its health care services. 

Veterans with higher priority include those with 

service-connected disabilities, low income, or both. 

In January 2003, VHA imposed a general freeze 

(with some subsequent modifications) on new 

enrollments in the lowest priority group (Priority 

Group 8).4

The Veterans Programs Enhancement Act of 1998 

(Public Law 105-368) guarantees access to VHA’s 

health care system, after separation from active military service, to members of the armed forces who 

have served on active duty in combat operations since 

the law was enacted in November 1998; reservists 

and members of the National Guard who have served 

in combat operations are included under that guarantee. Specifically, the law gave combat veterans two 

years (starting from their date of separation from the 

military) to enroll and use VHA’s health care system 

without requiring those veterans to document either 

that their income is below established thresholds or 

that they have service-connected disabilities—

requirements that noncombat veterans must fulfill. 

In 2008, lawmakers extended the enhanced eligibility 

period for care through VHA’s health care system to 

five years.5

 Under those legislative authorities, VHA 

provides free health care for medical conditions 

directly or potentially related to a veteran’s military 

service in combat operations for five years after separation. Veterans who had deployed to overseas contingency operations may continue to use VHA’s services when the five-year period of enhanced eligibility 

ends, but their priority group for enrollment may 

change, depending on their disability status and 

income. In particular, such veterans may be moved to 

a lower priority group, including Priority Group 8, 

and incur the applicable copayments for health care 

services.

Eligibility for disability compensation (the most 

costly of the mandatory programs administered by 

VBA) is determined on the basis of character of discharge and the rating of disability assigned by VBA. 

(Veterans who claim disability compensation are 

exempt from minimum time-in-service requirements.) To provide monthly disability benefits, VBA 

must have evidence that the veteran has a current disability, that the veteran incurred or aggravated an 

injury or disease while on active duty, and that the 

current disability is attributable to that serviceconnected medical problem. Once a veteran is judged 

to have met those criteria, VBA applies a rating of 

0 percent to 100 percent disabling in 10 percentagepoint increments; that rating can be raised or lowered 

as a veteran’s condition changes. Disability payments 

are determined by a veteran’s disability rating: The 

greater the impairment, the larger the payment. 

4. Veterans in Priority Group 8 have no service-connected 

disabilities (or have service-connected disabilities that are 

ineligible for monetary compensation) and have annual 

income or net worth above VA’s means-test threshold and 

regional income threshold. See Department of Veterans 

Affairs, “Health Benefits: Priority Groups Table” (August 20, 

2012), http://go.usa.gov/YmfF.

5. See section 1707 of the National Defense Authorization Act 

for Fiscal Year 2008, Public Law 110-181, 122 Stat. 493. 
12 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Continued

Box 3.

Projections of Defense Appropriations Under the 

Budget Control Act of 2011

The Budget Control Act of 2011 (BCA, Public Law 

112-25) made several changes to federal programs, 

set caps on discretionary appropriations through 

2021, and included automatic enforcement procedures that were to take effect if lawmakers failed to 

enact further legislation to reduce future budget deficits by specified amounts. At the time of the BCA’s 

enactment, its caps on discretionary appropriations 

called for appropriations over the 2012–2021 period 

that would be roughly $0.8 trillion lower in nominal 

dollars during that period than if appropriations grew 

at the rate of inflation. The BCA also stated that if 

legislation originating from a newly established Joint 

Select Committee on Deficit Reduction that was 

estimated to produce at least $1.2 trillion in deficit 

reductions (including an allowance for interest savings) was not enacted by January 15, 2012, automatic 

procedures for further limits on discretionary and 

mandatory spending would be triggered. Because 

no such legislation was enacted, those procedures are 

now scheduled to go into effect at the beginning of 

January 2013.

The triggering of the automatic enforcement procedures generated two changes to the way the caps will 

be implemented: It allocated the overall limits on discretionary appropriations between defense and nondefense budget functions by setting separate caps for 

each, and it reduced the total allowed funding below 

the original caps. For 2013, the additional reductions 

in allowed funding will be achieved by automatically 

canceling a portion of the budgetary resources already 

provided to that point (in an action known as sequestration); from 2014 to 2021, the reductions will be 

achieved by lowering the original caps on discretionary appropriations.1

 Under the BCA, there are no 

caps on funding for overseas contingency operations 

(OCO) or certain other activities.

Defense appropriations are defined as appropriations 

for budget function 050 (national defense), which 

includes the military activities of the Department of 

Defense (DoD), the nuclear weapons activities of the 

Department of Energy and the National Nuclear 

Security Administration, and the national security 

activities of several other agencies.2

 On average, 

during the past 10 years, funding for DoD has 

represented 95.5 percent of total funding for budget 

function 050.

Under the allocation of the BCA’s caps on discretionary appropriations stemming from the automatic 

enforcement procedures—but before the reductions 

in the caps resulting from those procedures—total 

funding for national defense during the 2013–2021 

period would be $290 billion less than what would 

have been provided if appropriations increased with 

inflation starting from the amount appropriated in 

2012. The automatic reductions will lower the caps 

on discretionary funding for national defense by an 

additional $492 billion over the 2013–2021 period, 

with the reduction spread evenly at nearly $55 billion 

per year. The resulting caps start at $491 billion in 

2013 and rise to $589 billion in 2021; the cap for 

2021 is 15 percent lower than the amount appropriated for 2012, adjusted for inflation.

If DoD was assessed the same share of the $55 billion 

per year in automatic reductions for national defense 

as the department has received in funding historically, 

its budget authority would be reduced by about 

$52 billion each year. For 2013, sequestration will 

apply both to the base budget and to funding for 

OCO, and the effect on the base budget alone is 

unclear; the amounts discussed here are estimated as 

though sequestration applied only to the base budget. 

1. For more information on those reductions, see Congressional 

Budget Office, An Update to the Budget and Economic 

Outlook: Fiscal Years 2012 to 2022 (August 2012), Box 1-1.

2. For information about the caps on discretionary budget 

authority for national defense, see Congressional Budget 

Office, Final Sequestration Report for Fiscal Year 2012

(January 2012), Table 2.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 13

CBO

Box 3. Continued

Projections of Defense Appropriations Under the 

Budget Control Act of 2011

DoD’s Funding Projected Under the Limits of the BCA

(Billions of dollars)

Source: Congressional Budget Office, Long-Term Implications of the 2013 Future Years Defense Program (July 2012), Table 1-4.

Note: DoD = Department of Defense; BCA = Budget Control Act of 2011; FYDP = Future Years Defense Program.

a. For 2013 to 2017, funding amounts correspond to DoD’s 2013 FYDP. For the extension of the FYDP (2018 to 2022), CBO projects 

the costs of DoD’s plans using the department’s estimates of costs to the extent they are available and costs that are consistent 

with CBO’s projections of price and compensation trends in the overall economy where the department’s estimates are not 

available. 

b. This estimate assumes that DoD would receive 95.5 percent of the funding limit for national defense before reductions arising 

from the BCA’s automatic enforcement procedures, on the basis of DoD’s average share of that funding in base budgets from 

2002 to 2011.

c. CBO estimates this value as the value for 2021 plus an adjustment for expected inflation. Discretionary funding related to federal 

personnel is inflated using the employment cost index for wages and salaries; other discretionary funding is adjusted using the

gross domestic product price index.

d. This estimate assumes that DoD would receive 95.5 percent of the funding limit for national defense after reductions arising 

from the BCA’s automatic enforcement procedures, on the basis of DoD’s average share of that funding in base budgets from 

2002 to 2011.

DoD’s base budget request for 2013 (net of OCO 

costs) exceeds estimated funding under the caps, 

before the automatic enforcement procedures are 

applied, by $5 billion (assuming DoD receives its 

historical share of funding for national defense). 

Through 2017, DoD’s budgetary plan exceeds its 

estimated share of those caps by a total of $22 billion 

in nominal terms (compare the first and second rows 

of the table for the years 2013 through 2017). The 

annual gap widens to $46 billion by 2021 (the final 

year explicitly addressed by the BCA) because the 

Congressional Budget Office’s extension of DoD’s 

plan incorporates military and civilian pay raises that 

keep pace with the employment cost index, health 

care costs that track with national trends, and other 

sources of cost growth that are not accommodated by 

the caps. Assuming that the additional cuts that 

would result from the BCA’s automatic enforcement 

procedures would be structured so that DoD continues to receive its historical share of funding for 

national defense, the cuts faced by DoD would be 

$52 billion per year—which would push funding far 

below the amounts in DoD’s plans (see the third row 

of the table).

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

2013 FYDP and Extensiona 526 534 546 556 567 607 620 641 661 680

Estimate of DoD's Funding Under the BCA Caps 

Before automatic reductionsb 521 531 540 551 563 576 588 602 615 632 c

After automatic reductionsd 469 479 488 499 511 524 536 549 563 578 c

2013 FYDP and Extensiona 526 527 529 529 530 556 556 563 570 575

Estimate of DoD's Funding Under the BCA Caps 

Before automatic reductionsb 521 524 524 525 526 527 527 529 530 534 c

After automatic reductionsd 469 472 473 475 477 480 481 483 485 489 c

Budget Control Act

Future Years Defense Program

Nominal Dollars

2013 Dollars
14 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Although DoD has proposed basic pay raises of 1.7 percent for 2013 and 2014—which are perhaps consistent 

with its projections of the employment cost index (ECI) 

for private-sector wages and salaries compiled by the 

Bureau of Labor Statistics—the department is planning 

to cap the pay raises at 0.5 percent in 2015, 1.0 percent 

in 2016, and 1.5 percent in 2017. Between the 5 percent 

cumulative reduction in end strength and the caps on pay 

raises, CBO projects that, on average, between 2013 and 

2017, the MILPERS account will increase by 0.7 percent 

per year in nominal terms but decline by 1.0 percent per 

year in real terms.

Two Scenarios for Military Compensation

CBO has formulated a pair of scenarios that illustrate 

what could happen to the military personnel appropriation (and to the broader construct of military 

compensation) if all of the BCA’s provisions—including 

sequestration (the automatic cancellation of a portion of 

budgetary resources) in 2013 and automatic reductions 

in the caps on funding for defense in 2014 through 

2021—unfolded as written in current law. CBO developed an extension of DoD’s 2013 FYDP using (to the 

extent they are available) the department’s estimates of 

program costs or (where DoD estimates are not available) 

estimates that are consistent with the price and compensation trends that CBO projects for the overall economy. 

Full implementation of the BCA would require cuts relative to DoD’s 2013 FYDP that average 10 percent per 

year over the department’s five-year planning period; relative to the 2013 FYDP and its extension, the cuts would 

average 12 percent per year through 2022. This report 

does not include a corresponding analysis for a scenario 

in which the original BCA caps remain in place but 

sequestration and the subsequent automatic reductions 

are avoided. In such a case, the cuts would average less 

than 1 percent per year relative to the 2013 FYDP 

through 2017 and about 4 percent per year relative to the 

FYDP and its extension through 2022.

Under CBO’s first scenario, cuts are made in equal 

proportion to DoD’s RDT&E and procurement appropriations—the composite category that DoD calls 

acquisition—and all other appropriations remain as they 

are under the 2013 FYDP. To comply with the BCA, the 

RDT&E and procurement appropriations would be cut 

by 37 percent each over the 2013–2022 period relative to 

the 2013 FYDP and its extension. The procurement 

account, which stood at $105 billion in the base budget 

for 2012, would be cut by an average of about $50 billion 

a year (in nominal dollars) over the next decade. Under 

CBO’s second scenario, across-the-board cuts are implemented that average 12 percent annually for all major 

appropriation accounts over the 2013–2022 period. Procurement funding between 2013 and 2022 would average 

about $80 billion (in nominal dollars) per year under the 

first scenario and about $110 billion under the second 

scenario.

Those scenarios are purely illustrative, and many other 

approaches and outcomes are plausible. For example, one 

could conceive of scenarios that disproportionately cut 

military compensation relative to the other portions of 

the defense budget, in turn requiring even larger reductions in end strength but preserving more funding for 

procurement. In the extreme, the same overall savings 

could be achieved if all other appropriation accounts 

remain as they are in the 2013 FYDP and its extension 

but military compensation is cut by an average of about 

45 percent per year. All of the scenarios that would 

achieve the amount of savings that the BCA requires 

relative to the 2013 FYDP would have significant implications for the ability of the U.S. military to accomplish 

its missions.

Acquisition-Only Cuts. Under CBO’s first scenario, all 

cuts mandated by the BCA would be made in equal proportion to the two acquisition appropriations: RDT&E 

and procurement. In contrast, the MILPERS and O&M 

appropriations (and therefore all elements of military 

compensation) would evolve according to DoD’s FYDP 

for 2013. The procurement appropriation would be cut 

by an average of about $50 billion per year (in nominal 

dollars) or by 37 percent over the 2013–2022 period relative to the 2013 FYDP and its extension; the RDT&E 

appropriation would be cut by the same percentage, 

amounting to an average cut of about $25 billion per year 

(see Figure 1).

Although CBO has not developed a list of specific 

changes to DoD’s procurement programs that could 

achieve those savings, it is clear that DoD would need to 

curtail or cancel many programs. For example, the Joint 

Strike Fighter (F-35) is DoD’s largest procurement program. The three variants of the F-35 would replace, 

respectively, the Air Force’s F-16s, the Navy’s and Marine 

Corps’ F/A-18s, and the Marine Corps’ AV-8Bs. Because 

those aircraft are approaching the ends of their design 

lifetimes, DoD would almost surely purchase some other 

aircraft if procurement of F-35s was canceled.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 15

CBO

Figure 1.

2013 FYDP and Two Scenarios for the Defense Budget

(Billions of dollars)

Source: Congressional Budget Office.

Notes: The 2013 FYDP and its extension are described in Congressional Budget Office, Long-Term Implications of the 2013 Future Years 

Defense Program (July 2012). 

FYDP = Future Years Defense Program; RDT&E = research, development, test, and evaluation.

a. Excludes costs for the Defense Health Program because they are included in the category Military Compensation.

CBO estimated last year that if DoD canceled the F-35 

program and instead purchased additional F-16s for 

the Air Force and F/A-18s for the Navy and Marine 

Corps, the net savings in outlays through 2021 would be 

$48 billion. That sum would constitute 11 percent of the 

total by which the procurement appropriation would 

need to be cut relative to the 2013 FYDP under this scenario.9

 (Net savings would be $78 billion if the entire 

planned fleet of F-35s—not all of which would be purchased by 2021—was replaced with F-16s and F/A-18s.)

Across-the-Board Cuts. Under CBO’s second scenario, 

all major appropriation accounts would be cut in equal 

proportion—by about 12 percent per year over the 

2013–2022 period relative to the 2013 FYDP and its 

extension—to comply with the BCA (see Figure 1). The 

impact on the procurement appropriation is not nearly as 

dramatic as under the first scenario, declining in this 

instance by an average of $16 billion (in nominal dollars) 

Military

Compensation

Military

Personnel

(Noncompensation)

Operation and

Maintenance

Family Housing and

Military Construction

RDT&E Procurement

0

50

100

150

200

250

Military

Compensation

Military

Personnel

(Noncompensation)

Operation and

Maintenance

Family Housing and

Military Construction

RDT&E Procurement

0

50

100

150

200

250

2013 FYDP and Extension Scenario 1 (Cuts to acquisition only) Scenario 2 (Cuts across the board)

2013

2022

a

a

9. See Congressional Budget Office, Reducing the Deficit: Spending 

and Revenue Options (March 2011), pp. 86–87.
16 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

relative to the FYDP and its extension over the next 

10 years; RDT&E would fall by an average of $8 billion. 

Military compensation costs also would be cut by 12 percent. DoD has a range of options for achieving those 

savings: Trim end strength (beyond the declines already 

planned in the FYDP), reduce pay and benefits per service member, or pursue some combination of those two 

approaches.

Achieving those savings by reducing the number of service members would require more than a 12 percent 

reduction in end strength because such large reductions 

would take several years to complete and only a fraction 

of the eventual savings would be available during the 

transition years. For example, if the drop in end strength 

was phased in evenly over the next five years, a 17 percent 

cut in 2017 and later (relative to the 2017 value for end 

strength in the 2013 FYDP) would be needed to achieve 

savings that average 12 percent over the period through 

2022. In all, that would mean shrinking the force by 

more than 240,000 people—more than currently serve in 

the Marine Corps (about 200,000). Achieving the same 

savings instead by reducing pay and benefits per service 

member gradually over a five-year period would require 

DoD to cut compensation by a similar percentage. 

Achieving the same savings through a combination of 

reductions to end strength and reductions in pay and 

benefits would result in smaller cuts to each.

Current Cash Compensation

Current cash compensation for military personnel 

includes regular military compensation and numerous 

types of special pay and bonuses. Cash compensation 

changes over time according to formulas and in keeping 

with legislative action. Lawmakers authorized military 

pay raises for January 2008, 2009, and 2010 that each 

exceeded the percentage increase in the ECI for wages 

and salaries in private industry—a common benchmark—by 0.5 percentage points.10 Beginning more than 

a decade ago, the housing allowance also has been 

restructured. In 2000, service members typically paid 

about 20 percent of their own housing costs, but by 

2005, out-of-pocket expenses for the average military 

family had been eliminated. DoD reports that, as a result 

of those and other actions between January 2002 and 

January 2010, basic pay for the average service member 

increased by 42 percent (in nominal dollars), housing 

allowances increased by 83 percent, and the subsistence 

allowance increased by 40 percent.11 CBO estimates that 

cash compensation increased by 52 percent overall during 

that period, whereas private-sector wages and salaries rose 

by 24 percent.

Consistent with those increases in cash compensation, 

year-to-year continuation rates (the proportion of 

enlisted personnel serving on active duty in the preceding 

year who are still in an active-duty status during the year 

in question) were higher at the end of the last decade than 

they were at the beginning. The services saw declines in 

continuation rates of various degrees in the middle of the 

decade that were associated with lengthy deployments to 

Iraq and Afghanistan (see Figure 2). The Army partially 

mitigated its decline by using “stop-loss” policies to 

involuntarily extend soldiers’ contracts.12 The declines 

in continuation rates for all four services were reversed 

later in the decade when the U.S. economy worsened, 

deployments to Iraq tapered off, and increases in cash 

compensation continued to mount. Higher continuation 

rates help the military services to maintain or increase the 

number of people in the force and its readiness. In doing 

so, they increase the average tenure of the force, in turn 

boosting the compensation bill because the basic pay 

table rewards both pay grade and longevity.

Policies that limit annual raises could slow future growth 

in cash compensation. Those policies could take the form 

of capping increases in the basic pay table below the projected increase in the ECI, as DoD proposed in its 2013 

budget submission. Alternatively, DoD has the authority 

to set certain types of special pay, bonuses, and allowances

10. The annual pay raises are tabulated in Charles A. Henning, 

Military Pay and Benefits: Key Questions and Answers, CRS Report 

for Congress RL33446 (Congressional Research Service, updated 

May 13, 2011). The pay raise that took effect on January 1, 2007, 

included an across-the-board increase that matched the 

2.2 percent rise in the employment cost index, supplemented by 

an additional targeted pay raise that ranged from 2.5 percent for 

E-5s to 5.5 percent for E-9s but delayed until April 1, 2007.

11. Statement of William J. Carr, Deputy Under Secretary of Defense 

for Military Personnel Policy, before the Subcommittee on 

Personnel, Senate Committee on Armed Services (April 28, 

2010), http://go.usa.gov/yNp.

12. See Congressional Budget Office, Recruiting, Retention, and Future 

Levels of Military Personnel (October 2006). During 2005, the 

Army had an average of 7,000 enlisted soldiers who were 

involuntarily kept in the service past their contracted separation 

dates. Almost all left when their stop-loss orders expired.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 17

CBO

Figure 2.

Year-to-Year Continuation Rates Among Active-Duty Enlisted Personnel

(Percent)

Source: Congressional Budget Office based on Department of Defense, Personnel and Readiness, Population Representation in the Military 

Services, Fiscal Year 2010 (2011), Table D-32, http://go.usa.gov/ye8.

Note: Year-to-year continuation rates measure the proportion of personnel serving on active duty in the preceding year who are still in 

active-duty status during the year in question.

within limits set in current law. DoD could reduce some 

of those rates of pay on its own initiative, or lawmakers 

could reduce those rates through legislative action.

Elements of Cash Compensation

DoD has used regular military compensation as a fundamental measure of military pay at least since 1962.13

(RMC consists of basic pay plus subsistence and housing 

allowances and an estimate of the financial advantage that 

arises because those allowances are not subject to federal 

income taxes.)14 All active-duty personnel (including 

guard and reserve personnel serving on active duty) are 

entitled to receive RMC.15 That compensation does not 

include most special pay, incentive pay, and other allowances that service members can receive. Special and 

incentive pay usually are awarded for obtaining particular 

skills or for performing hazardous duty, including 

deployment and combat. Members also can earn bonuses 

when they reenlist for several years, especially if they possess occupational skills that are in short supply. 

DoD offers more than 60 types of special pay and 

bonuses, although an individual member might receive 

none or only a few at any time. For example, military 

personnel currently earn special pay at the rate of 

$225 per month (prorated daily for partial months) to

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

80

82

84

86

88

90

92

Army

Navy

Marine Corps

Air Force

13. See Department of Defense, Report of the Ninth Quadrennial 

Review of Military Compensation, vol. 1 (March 2002), p. 29,

http://go.usa.gov/yNv. See also the statement of Carla Tighe 

Murray, Senior Analyst, Congressional Budget Office, before 

the Subcommittee on Personnel, Senate Committee on Armed 

Services, Evaluating Military Compensation (April 28, 2010); and 

Congressional Budget Office, Evaluating Military Compensation

(June 2007).

14. RMC does not include tax advantages that arise when a service 

member declares residence in a state that has an income tax if that 

state excludes certain types of military pay from taxable income. 

RMC also excludes other tax benefits, such as the exclusion from 

federal income tax of many types of pay and bonuses (up to certain limits) if earned in a combat zone. For an explanation, see 

Department of Defense, “Combat Zone Exclusions” (accessed 

November 8, 2012), http://go.usa.gov/yNw. For this analysis, 

CBO has not estimated the magnitude of those tax advantages.

15. Single enlisted members in their first few years of service may live 

in barracks and not receive a housing allowance. In earlier work, 

CBO estimated an imputed value for barracks housing, which was 

slightly higher than the housing allowance for junior personnel. 

Substituting that value for the allowance would increase the cash 

compensation for junior enlisted members, but the increase would 

be small. See Congressional Budget Office, Evaluating Military 

Compensation (June 2007), p. 13.
18 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Table 3.

Procedures for Updating Military Compensation 

Source: Congressional Budget Office.

Notes: ECI = employment cost index for wages and salaries (the Bureau of Labor Statistics’ index for the private sector); NDAA = National 

Defense Authorization Act.

a. The percentage change in the ECI is measured over the four quarters ending with the third quarter of the calendar year immediately 

preceding the budget submission (37 U.S.C. 1009, Adjustments of monthly basic pay). For example, the percentage change from the third 

quarter of 2009 to the third quarter of 2010 determined the pay raise for the 2012 budget submission; that budget was submitted in 

February 2011, and the pay raise took effect in January 2012.

b. The 2008 NDAA initiated a process under which lawmakers would set caps on broad groups of bonuses and forms of special pay, ceding to 

the Department of Defense the authority to set eligibility criteria and detailed pay levels consistent with those caps. Implementation of 

that authority is phased in over 10 years from the date of the NDAA’s enactment and thus will be completed by January 28, 2018.

serve in areas posing “imminent danger of being exposed 

to hostile fire or explosion of hostile mines.” In addition, 

service members may be paid up to $225 per month (not 

prorated, at DoD’s discretion) if “exposed to hostile fire 

or a hostile mine explosion event” for even one day in a 

month.16

In its base budget request for 2013, DoD included $7 billion in special pay, incentive pay, and allowances (other 

than those for housing and food) for active-duty service 

members, amounting to about 6 percent of the department’s proposed total payments to those members from 

the MILPERS appropriation.

How Cash Compensation Has Evolved Over Time

DoD can boost some elements of cash compensation 

within statutory limits, other elements are adjusted annually on the basis of the increase in a specified price index 

or other external metric, and still others require explicit 

legislative action (see Table 3). 

The basic housing allowance is authorized through permanent law; DoD adjusts the amounts each year on the 

basis of local surveys of housing prices, without requiring 

either an explicit policy decision by the department or 

legislative action. Separately, lawmakers must explicitly 

act to renew various authorities that expire at the end of 

each year, such as those for bonuses to personnel trained 

in particular specialties. For example, the National 

Defense Authorization Act (NDAA) for Fiscal Year 2012 

granted one-year extensions of authority to award certain 

bonuses and special pay to reserve forces, health care 

professionals, nuclear-qualified officers, and aviation 

officers.17 That law also extended DoD’s authority under 

title 37 of the United States Code to pay enlistment, 

reenlistment, and officer accession and retention bonuses; 

assignment incentive pay and special duty pay;

Basis for Update

Basic Pay Percentage change in ECI (in accordance with the 2004 NDAA, unless

overridden in the current session of Congress).a

Basic Allowance for Housing Annual survey of rental prices for housing, including utility costs and

renter's insurance, by size of residence and geographical area.

Pays and Allowances in Permanent Law (For example, family Payment amounts (rates and caps) set in law (Title 37, United States

separation allowance, hazardous duty pay, and sea pay) Code); subject to periodic legislative revision.

Bonuses and Special Pays Subject to Annual Reauthorization Payment amounts (rates and caps) set in law (Title 37, United States

(For example, enlistment, reenlistment, and officer accession and Code). Lawmakers must reauthorize in each annual NDAA and may

retention bonuses) also periodically revise payment rates or caps.b

16. Section 616 of the National Defense Authorization Act for Fiscal 

Year 2012 (P.L. 112-81) instituted the proration of imminent 

danger pay. Imminent danger pay and hostile fire pay are codified 

in 37 U.S.C. §310 (2006 & Supp.), Special pay: duty subject to 

hostile fire or imminent danger.

17. Sections 611 through 615 of the 2012 NDAA, P.L. 112-81, 

125 Stat. 1449–1451.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 19

CBO

and skill incentive pay and proficiency bonuses.18 Other 

forms of pay and allowances, such as hazardous-duty 

pay and the family separation allowance, stay as they are 

currently until lawmakers adjust them.

The 2000 NDAA indexed annual increases in basic military pay through 2006 to the percentage increase in the 

ECI. In 2004, that temporary measure was overridden 

and a permanent link was established between the military pay raise and the percentage increase in the ECI.19

As noted earlier, however, in enacting annual defense 

authorizations and appropriations, lawmakers often 

adjust the basic pay table by a percentage that deviates 

from the ECI, almost always in a direction that exceeds it 

(not since 1998 has the pay raise been smaller than the 

percentage increase in the ECI). 

Various groups have advocated for such pay raises to rectify a perceived gap between basic military pay and the 

wages and salaries of comparable civilian workers. They 

generally begin with the presumption that the relatively 

large increases in military basic pay that were enacted in 

the early 1980s resulted in military pay scales that, by 

1982, were largely comparable to those for equivalent 

work performed in the private sector.20They often go on 

to observe that the cumulative increase in basic pay 

since 1982 has fallen short of the cumulative increase in 

the ECI and draw the conclusion that military compensation is falling behind that for comparable civilian jobs.21

In 1998 and 1999, the difference between the two 

cumulative increases—called the pay gap—peaked at 

13.5 percent. The 11 military pay raises in excess of the 

ECI between January 2000 and January 2010, however, 

closed most of the gap, which stood at slightly more than 

2 percent in 2010. That value was unchanged after the 

January 2011 and January 2012 pay raises, which just 

equaled the respective increases of 1.4 percent and 

1.6 percent in the ECI for those years.

However, neither the concept nor the measurement of 

the pay gap is straightforward. First, the presumption that 

military and civilian pay were comparable or equivalent 

in 1982 is open to question. During Congressional testimony in advance of the 1982 pay raise, a department 

official in effect pushed the problem back 10 years by 

asserting that DoD’s 1982 budget request would restore 

the comparability between military and civilian pay that 

existed in 1972.22 However, the all-volunteer force had 

not been established by 1972; draft-era military pay, at 

least in the junior ranks, was set well below the pay scales 

that prevailed in civilian labor markets.23 Therefore, the 

basis for measuring changes in relative pay starting from 

1982 is tenuous.

Second, focusing on a single component of cash compensation—basic pay—gives an incomplete picture of the 

magnitude of the total cash portion of military compensation. Even assuming that pay comparability prevailed 

in 1982, the pay gap reversed its sign in 2002 when 

recomputed using the more comprehensive and appropriate measure of regular military compensation. By January 

2010, the cumulative increase since 1982 in RMC had 

exceeded the cumulative increase in the ECI by 

11 percent. 24

18. The 2008 NDAA (P.L. 110-181, 122 Stat. 163) initiated a process 

under which lawmakers would set caps on broad groups of 

bonuses and forms of special pay, ceding to DoD the authority to 

set eligibility criteria and detailed pay levels consistent with those 

caps. Implementation of that authority is phased in over 10 years 

from the date of enactment and thus will be completed by January 

28, 2018.

19. Section 602 of the 2000 NDAA (113 Stat. 644), superseded by 

section 602 of the 2004 NDAA (117 Stat. 1498, 37 U.S.C. 

§1009 (2006)), Adjustments of monthly basic pay.

20. That presumption on the part of various groups has been reported 

by James Hosek, “A Recent History of Military Compensation 

Relative to Private Sector Compensation,” in Department of 

Defense, Report of the Ninth Quadrennial Review of Military 

Compensation, vol. 2 (March 2002), p. 65, http://go.usa.gov/yNv.

21. For example, that view is expressed in Military Officers 

Association of America, “Military Pay Comparability” (accessed 

November 8, 2012), www.moaa.org/Main_Menu/Take_Action/

Top_Issues/Serving_in_Uniform/Military_Pay_Comparability.html.

22. See the statement of Major General Dean Tice, Deputy Assistant 

Secretary of Defense (Military Personnel Policy), in U.S. House of 

Representatives, Department of Defense Appropriations for 1982, 

hearings before the Subcommittee on the Department of Defense 

of the Committee on Appropriations (June 1, 1981); reported in 

Congressional Budget Office, What Does the Military “Pay Gap” 

Mean? (June 1999), pp. 49–51. 

23. President’s Commission on an All-Volunteer Armed Force, Report 

of the President’s Commission on an All-Volunteer Armed Force

(February 1970).

24. See the statement of Carla Tighe Murray, Senior Analyst, 

Congressional Budget Office, before the Subcommittee on Personnel, Senate Committee on Armed Services, Evaluating Military 

Compensation (April 28, 2010); and Congressional Budget Office,

Long-Term Implications of the 2011 Future Years Defense Program

(February 2011), Figure B-1.
20 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Military and Civilian Compensation Compared

DoD has set a goal for the educational attainment of its 

enlisted personnel: At least 90 percent of those recruited 

to active duty in each service branch who have had no 

prior military service are to be high school graduates (a 

percentage that does not include recruits who hold the 

GED certificate), and at least 60 percent in each branch 

are to have scores above the national median on the 

Armed Forces Qualification Test, a screening instrument 

used by all branches of the military to assign enlisted personnel to specific military occupations. The services met 

all of the testing goals for the past decade, although the 

Army did so just barely in 2006, 2007, and 2008. The 

Army missed its goal for recruiting high school graduates 

in 2005 through 2008; in 2009, the Army rebounded, 

and 95 percent of its recruits were high school graduates 

(see Figure 3).

DoD has asserted that it does not expect to meet its goals 

for recruit quality unless RMC for enlisted personnel is 

set at the 70th percentile of earnings for civilians with 

some college education (many enlisted personnel go on to 

earn some postsecondary credits).25 CBO’s most recent 

detailed analysis, for calendar year 2006, showed that, on 

average, RMC exceeded the 75th percentile of earnings 

for comparably educated civilians, surpassing DoD’s 

goal.26 Thus, roughly three-quarters of civilians with 

comparable education had earnings that were lower than 

average RMC, and one-quarter had earnings that were 

higher. DoD recently updated that analysis, finding that 

average RMC in 2009 had risen relative to the civilian 

wage distribution. The average RMC for enlisted personnel reached the 90th percentile relative to the combined 

comparison group consisting of civilians with high school 

diplomas, those with some college, and those with twoyear degrees; the average RMC for officers reached the 

83rd percentile relative to the combined group of 

civilians with bachelor’s degrees and those with a master’s 

degree or higher.27

If the value of current noncash and deferred compensation (such as pensions and current and future benefits for 

health care) is included, total compensation for military 

personnel appears higher still than that for civilian workers in the economy. DoD has estimated that the value of 

current noncash and deferred compensation about equals 

that of RMC, effectively doubling the current cash pay 

of military personnel.28 CBO’s estimates are similar: 

For example, in 2006, noncash and deferred cash pay 

together boosted cash pay by about 80 percent for an 

unmarried sergeant (pay grade E-5 with six years of service) and by about 115 percent for a married sergeant.29

By contrast, CBO has estimated that current noncash 

and deferred benefits (such as paid leave, health insurance, and retirement benefits) add an average of about 

45 percent to the value of cash pay for civilians with a 

high school diploma or less and the same percentage for 

those with some college.30

Projected Costs of Cash Compensation

DoD’s 2013 base budget included a request for a 

$135 billion MILPERS appropriation. The department 

plans to reduce active-duty end strength by a total of 

about 5 percent over the five years spanned by the 2013 

FYDP, from 1,392,000 in 2013 to 1,320,000 by 2017. 

However, DoD proposes that, in 2013, the personnel 

costs for 41,000 soldiers and 15,000 marines on active 

duty be shifted from the base budget to the OCO budget; the costs of the remaining 1,336,000 active-duty personnel in 2013 would be paid from the base budget. That 

procedure is followed, to a lesser degree, in the later years 

of the 2013 FYDP so that the steady-state force of 

1,320,000 active-duty personnel is paid from the base 

budget starting essentially as early as 2014 and a diminishing number of personnel are paid from the OCO 

budget: 47,000 in 2014, 29,000 in 2015, and 12,000 in 

25. DoD’s goal of paying at the 70th percentile was first stated in 

Department of Defense, Report of the Ninth Quadrennial Review of 

Military Compensation, vol. 1 (March 2002), http://go.usa.gov/

yNv; that goal was based on the findings of James Hosek and 

others, An Analysis of Pay for Enlisted Personnel (RAND 

Corporation, 2001), www.rand.org/pubs/documented_briefings/

DB344.html. The recruiting goals are further explained in 

Department of Defense, Report of the Tenth Quadrennial Review of 

Military Compensation, vol. 1, Cash Compensation (February 

2008), pp. 3–5, http://go.usa.gov/VPQ. 

26. See Congressional Budget Office, Evaluating Military 

Compensation (June 2007), pp. 12–13.

27. James E. Grefer and others, “Military and Civilian Compensation: 

How Do They Compare?” in Department of Defense, Report of 

the Eleventh Quadrennial Review of Military Compensation, vol. 2, 

Supporting Research Papers (July 2012), http://go.usa.gov/wZ1.

28. See Department of Defense, Report of the Tenth Quadrennial 

Review of Military Compensation, vol. 2, Deferred and Noncash 

Compensation (July 2008), p. xi, http://go.usa.gov/y0s. 

29. See Congressional Budget Office, Evaluating Military Compensation (June 2007), p. 7.

30. See Congressional Budget Office, Comparing the Compensation of 

Federal and Private-Sector Employees (January 2012).
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 21

CBO

Figure 3.

Quality Trends Among Enlisted Recruits in the Active Military 

Who Did Not Have Prior Military Service

(Percent)

Sources: Congressional Budget Office based on Department of Defense, Personnel and Readiness, “Military Recruiting Results, Recruit 

Quality by Year Since FY 1973” (accessed November 8, 2012), http://go.usa.gov/V96; and James Hosek and others, Should the 

Increase in Military Pay Be Slowed? (RAND Corporation, 2012), www.rand.org/pubs/technical_reports/TR1185.html.

Note: Accessions into the National Guard and the reserves are excluded.

a. The group with a high school diploma excludes recruits who hold alternative certification, such as the GED (General Educational 

Development) credential.

b. The Armed Forces Qualification Test (AFQT) is used to screen recruits to all branches of the military and to assign enlisted personnel to 

specific military occupations. Some high schools use the test to gauge students’ interest in the military and other careers. The AFQT 

comprises arithmetic reasoning, mathematics knowledge, paragraph comprehension, and word knowledge. Percentile scores measure 

aptitude relative to the entire U.S. population between the ages of 18 and 23. Recruits who score above the national median are classified 

by the military into percentile categories relative to the U.S. population: I (93rd to 99th percentile), II (65th to 92nd percentile), or 

IIIA (50th to 64th percentile)

High School Diplomaa

Score Above the Median on the AFQTb

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

60

70

80

90

100

Army

Navy

Marine Corps

Air Force

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

60

70

80

90

100

Army

Navy

Marine Corps

Air Force
22 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

2016. Incorporating DoD’s plan for small increases in 

basic pay (discussed below), the 2013 FYDP projects 

MILPERS costs that are essentially flat at $135 billion (in 

2013 dollars) over the period through 2017.

In its analysis of the 2013 FYDP, CBO estimated the personnel costs of the service members proposed to be paid 

from the OCO budget, and the agency shifted those costs 

back to the base budget.31 As a result, CBO shifted about 

$5 billion in MILPERS costs back to the base budget in 

2013, enlarging the MILPERS account from $135 billion to $140 billion in that year. With that procedure 

repeated for subsequent years, MILPERS costs would 

not be flat, CBO projects, but would decline from 

$140 billion in 2013 to $135 billion by 2017 (a real 

decline averaging 1 percent per year) as end strength falls 

throughout the five-year period.

Much of the historical increase in the cost per service 

member stems from increases in basic pay that have kept 

pace with or exceeded the growth rate of the ECI, which 

in turn grew more rapidly than the implicit price deflator 

for gross domestic product (GDP)—a common measure 

of overall inflation—in all but four years between 1981 

and 2012. In contrast, DoD’s plans for the 2013–2017 

period do not include military pay raises that keep pace 

with the ECI. The department’s plans include a 1.7 percent pay raise for 2014, which is below CBO’s projection 

of the increase in the ECI for that year but is perhaps 

consistent with DoD’s own projection of the ECI. For 

2015 through 2017, DoD is proposing pay raises of 

0.5 percent, 1.0 percent, and 1.5 percent, respectively—

all deliberately smaller than the department’s projection 

of ECI growth for those years. With that series of pay 

raises, basic pay would remain essentially flat in real terms 

(relative to the GDP deflator) over the FYDP period and 

lose a total of 11 percentage points of growth relative to 

CBO’s projection of the ECI over those years. If, contrary 

to DoD’s current plans, lawmakers restored pay raises at 

the ECI benchmark starting in 2014, CBO estimates that 

the MILPERS appropriation—instead of falling from 

$140 billion in 2013 to $135 billion (in 2013 dollars) by 

2017—would increase to $145 billion by 2017, or by a 

total of almost 3 percent over the period.32

Controlling the Costs of Cash Compensation

Because basic pay is the largest element of cash compensation, policy alternatives that would limit annual raises 

hold considerable potential to slow growth in costs. 

Although retention of military personnel might suffer, 

that effect could be mitigated by boosting the amounts 

available for selective reenlistment bonuses (SRBs, which 

are offered to service members in hard-to-fill occupations). In the past, CBO has estimated budget options 

that would save roughly $6 billion in outlays over 5 years 

and $17 billion over 10 years by capping the annual 

increase in basic pay at 0.5 percentage points below the 

increase in the ECI for four years while increasing 

SRBs.33 If a more stringent cap was applied or the same 

cap was maintained for a longer period, more could be 

saved.

One advantage of shifting some portion of cash compensation from basic pay to SRBs is that such bonuses are 

paid only to service members who have come to the end 

of an obligated term of service and are deciding whether 

to reenlist. That makes SRBs much more cost-effective 

than providing a pay raise to the entire force as a way to 

retain some fraction of the total. Furthermore, the services routinely award larger SRBs to people in military 

occupations in short supply; each branch is appropriated 

an annual SRB budget and is free to adjust allocations 

among the various occupations as conditions change during a given year. Finally, unlike pay raises, SRBs do not 

compound from one year to the next nor do they affect 

the value of retirement annuities. 

Military Retirement Benefits

The military retirement system—predominantly a 

defined-benefit system that requires no contributions 

from employees—is a significant part of military compensation. The retirement system requires most military 

personnel to have 20 years of service for vesting, although 

disability retirement is sometimes granted sooner. As they 

approach retirement, service members can choose 

between one defined-benefit plan that offers a stated 

monthly payment and another that initially provides a 

lump-sum bonus during the member’s 15th year of active 

service but then makes a smaller monthly payment once 

the member has retired. Active-duty retirees receive benefits immediately upon retirement, regardless of age—

31. See Congressional Budget Office, Long-Term Implications of the 

2013 Future Years Defense Program (July 2012), p. 15.

32. Ibid., p. 4.

33. See Congressional Budget Office, Reducing the Deficit: Spending 

and Revenue Options (March 2011), pp. 76–77.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 23

CBO

in some cases as early as age 37. Retirees from the reserves 

generally do not begin to collect benefits until they reach 

the age of 60. Since 2001, service members also have 

been eligible to participate in the federal Thrift Savings 

Plan, or TSP—a defined-contribution plan that is similar 

to a private-sector 401(k) plan—although generally without any matching contributions from the government. 

To fund the retirement system, DoD sets aside an 

amount equal to a predefined percentage of basic pay in 

accrual payments while service members are on active 

duty. Future costs are dictated by the structure of the benefits, the mix of people receiving them, and inflation in 

the economy that determines the annual cost-of-living 

adjustment (COLA). For the future, costs could be managed by changing the vesting period, by changing the mix 

of defined benefits and defined contributions, or by some 

other means.

Alternative Retirement Plans

The defined-benefit portion of the military retirement 

benefit takes the form of an immediate annuity that is 

paid to military personnel who retire after at least 

20 years. To protect against inflation, that annuity is 

boosted by a COLA equal either to the annual percentage 

change in the consumer price index for urban wage earners and clerical workers (CPI-W) or to that quantity 

minus 1 percentage point, depending on the retirement 

plan chosen by the service member.

High-3 Retirement Plan. For people who entered military 

service between September 8, 1980, and July 31, 1986, 

the annuity for a 20-year career has been set equal to 

50 percent of the member’s “High-3” basic pay, which is 

computed as the average of the 36 highest months of 

basic pay in the service member’s career (the 50 percent 

factor is called the multiplier). The annuity increases with 

additional years of service, but until the end of 2006, the 

amount was capped at 75 percent of High-3 basic pay for 

members who retired after 30 or more years of service; 

that cap was subsequently lifted for people who retired 

after December 31, 2006.34

REDUX Retirement Plan. The Military Retirement 

Reform Act of 1986 (P.L. 99-348) created the REDUX 

retirement system for all personnel entering military service on or after August 1, 1986. The REDUX multiplier 

is 40 percent (rather than 50 percent) of a member’s 

High-3 basic pay after 20 years of service, but it increases 

to 75 percent of basic pay after 30 years of service. 

REDUX also provides only partial insulation from inflation rather than the full protection offered by the High-3 

system. Until age 62, a retiree’s annual COLA under 

REDUX equals the annual percentage increase in the 

CPI-W minus 1 percentage point. At age 62, the annuity 

payment is recomputed so that the retiree receives the 

same payment in that year under the REDUX system 

that would be paid under the more generous High-3 

system: The multiplier is reset to the value it would 

have been under High-3 (for example, boosted from 

40 percent to 50 percent for a 20-year career); the new 

multiplier is applied to the retiree’s original highest 

36 months of basic pay; and the current retirement annuity is recalculated by applying a full COLA (based on the 

cumulative growth of the CPI-W since the member’s 

retirement, without the 1 percentage-point penalty). 

After the retiree passes age 62, the retirement annuity 

is again subject to a COLA equal to the increase in the 

CPI-W minus 1 percentage point (see Figure 4).

The first cohort of service members that would have been 

affected by REDUX began to retire in 2006. However, 

the 2000 NDAA preempted its implementation by giving 

military personnel a choice between two plans, both 

more generous than REDUX as initially conceived: the 

original High-3 plan or an enhanced REDUX plan.35

Service members who anticipate retirement may choose 

during their 15th year of service either the High-3 plan or 

the less generous REDUX formula; those who choose the 

latter receive the Career Status Bonus, a lump-sum payment of $30,000, in the same year.36 A service member 

who accepts that bonus but does not complete 5 more 

years to attain the full 20 years of military employment 

must repay a prorated share of the bonus as a penalty for 

separating early.

34. The 2007 NDAA (120 Stat. 2259, 10 U.S.C. §1409(b)(2006 & 

Supp.)) increased the amount in determining the annuity for nondisability retirement from the active military. The multiplier for 

most active military personnel who retired after December 31, 

2006, was reset at 2.5 percent times the years of service credited—

without the cap—so that very senior personnel (those with more 

than 30 years of service) could retire at more than 75 percent and 

conceivably more than 100 percent of their High-3 basic pay.

35. Sections 641 through 644 of the 2000 NDAA, P.L. 106-65, 

113 Stat. 662–664 (1999). 

36. See Department of Defense, “CSB/REDUX Retirement System” 

(accessed November 8, 2012), http://go.usa.gov/yRp.
24 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Figure 4.

Illustration of Military Retirement Pay, 

by Year of Age, Under High-3 and 

REDUX

(Dollars)

Source: Congressional Budget Office.

Note: Under the High-3 plan, monthly retirement pay after 

20 years of service equals 50 percent of the average of the 

36 highest months (three years) of basic pay in the service 

member’s career; the 50 percent factor is called the 

multiplier. In the example shown, average pay for the 

highest three years of service is $41,550, and annual pay in 

the first year of retirement (at age 40) is half of that amount, 

or $20,775. Under the REDUX plan, the service member 

receives a Career Status Bonus, a lump-sum payment of 

$30,000 in the 15th year of military service, and the 

multiplier is 40 percent after 20 years of service. In the 

example, annual pay under the REDUX plan for the same 

service member in the first year of retirement is reduced to 

$16,620. Under High-3, retirement pay is adjusted annually 

on the basis of the consumer price index for all urban 

wage earners and clerical workers (CPI-W); under REDUX, 

retirement pay is adjusted annually by the CPI-W minus 

1 percentage point, except for a one-time catch-up at 

age 62. Calculations were made under the assumption that 

the service member retired in 2011 at age 40 after 20 years 

of military service having served the final three years at pay 

grade E-6 (staff sergeant) and that the CPI-W increases at 

the rate of 1.5 percent per year starting in 2011.

The rationale for setting the Career Status Bonus at 

$30,000 is not clear. That sum is not actuarially fair—it 

does not financially compensate the military retiree for 

what could easily be four decades of smaller annuity payments under the REDUX formula. The bonus has 

become smaller relative to forgone annuity payments over 

time because life expectancy has increased and because 

the bonus amount is not indexed to inflation and has 

been fixed at $30,000 since its inception. The bonus is 

taxable except when a service member’s election of the 

REDUX option is finalized during a month in which the 

member is serving in a designated combat zone.37 One 

report estimates that to achieve an actuarially fair outcome, the military retiree (unless serving in a combat 

zone) would need to have opportunities to invest the 

$30,000 bonus (net of applicable taxes for the year in 

which the bonus was received) at before-tax rates of 

return ranging from 10 percent to 20 percent (the exact 

rate would depend on the person’s age, years of service, 

and pay grade at retirement). The same report also states 

that the number of marines choosing the REDUX option 

fell from 57 percent in 2001 to 15 percent in 2010, 

reflecting erosion in the inflation-adjusted value of the 

$30,000 bonus and, perhaps, a growing awareness among 

service members about the REDUX option’s drawbacks.38

(That report contains no data on the retirement choices 

made by soldiers, sailors, or airmen.)

Other Features of Military Retirement

Several other features of the military retirement system 

are noteworthy. The system offers a defined-contribution 

option, but DoD has decided not to exercise its authority 

to match service members’ contributions. Active-duty 

personnel are generally vested in the defined-benefit component of their retirement plan after 20 years of service. 

Those who retire after 20 years may begin to draw retirement pay immediately, but those who separate earlier do 

not receive any retirement benefits. That dichotomy has a 

major influence in shaping the military’s force structure: 

It provides a strong incentive for midcareer personnel to 

remain in the military until they have completed 20 years 

of service but a much weaker incentive for those who 

have completed 20 years to continue their service into a 

third decade. 

Thrift Savings Plan. An optional defined-contribution 

component for retirement saving, the TSP was made 

available to service members under the 2001 NDAA.39

40 45 50 55 60 65 70 75

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Age

High-3

REDUX

37. See Department of Defense, “Combat Zone Exclusions” (accessed 

November 8, 2012), http://go.usa.gov/yR6.

38. Aline Quester and others, Retirement Choice: 2011 (Center for 

Naval Analyses, February 2011), www.cna.org/research/2011/

retirement-choice-2011. That study was first published in 2003 

and has been revised periodically since then.

39. See Department of Defense, “Thrift Savings Plan (TSP)” 

(accessed November 8, 2012), http://go.usa.gov/yRe.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 25

CBO

Military personnel may make tax-deferred contributions 

to TSP accounts that are equal to any percentage (1 to 

100) of their basic pay, subject to annual dollar limits set 

by the Internal Revenue Code. Service members also may 

contribute up to the full amount of a Career Status Bonus 

or any reenlistment bonus received in a designated combat zone, subject to the combat-zone tax exclusion.40

During 2011, about 40 percent of active-duty service 

members participated in the TSP. (See Appendix A for a 

description of various other enhancements to the military 

retirement system enacted since 2000.) 

The military services do not currently match service 

members’ TSP contributions, as the federal government 

does for civilian employees, so the only cost to DoD is for 

administration. (The Army had a pilot program offering 

TSP matching contributions as an enlistment incentive 

from April 1, 2006, to December 31, 2008. The Army 

suspended the program in 2007 after analyzing its 

results.) Because TSP contributions are made from 

before-tax income, the program also reduces federal 

revenues. 

Vesting. Members of the U.S. military are “cliff vested” in 

the retirement system. That is, they become eligible to 

receive benefits only upon reaching 20 years of service; 

there are no incremental vesting steps along the way. As a 

result, many people leave the service before attaining eligibility and so, apart from their own TSP accumulations, 

most service members earn no military retirement at all. 

On the basis of the continuation rates that have been 

observed over the past few years, DoD currently estimates 

that 49 percent of active-duty officers and 17 percent of 

active-duty enlisted personnel will stay in the service long 

enough to earn nondisability retirement benefits.41

According to one estimate of the value to military personnel of those benefits, a service member would be willing 

to accept an immediate payment equal to 28 percent of 

the government’s cost today of providing a dollar of 

retirement benefits in 10 years, even if he or she is certain 

to remain in the military until retirement.42 The valuation of the retirement benefit would be smaller still for 

service members who are earlier in their careers and 

uncertain whether they will serve a full 20 years. However, the valuation steadily increases during the second 

decade of service, acting as an incentive to complete the 

full 20 years and qualify for retirement benefits. Evidence 

of the draw of retirement vesting (possibly along with 

other factors) is found in the annual continuation rates 

estimated from a cross section of enlisted personnel during 2010. Those rates exceeded 90 percent for people 

with at least 9 years of service, and they climbed to more 

than 97 percent for people with at least 15 years of service 

(see Figure 5). (The notches in Figure 5 at 4 years of service and again at 8 years reflect the proportion of people 

who choose not to reenlist at the end of the typical 4-year 

enlistment and reenlistment periods.) The continuation 

rate plummets to 63 percent during the 20th year because 

more than one-third of service members retire essentially 

as soon as they become eligible.

Accrual Funding. To account for its future liabilities in 

defined-benefit pensions for current service members, 

DoD makes accrual payments to the Military Retirement 

Fund for service members while they are still on active 

duty.43 (See Appendix B for additional information 

regarding accrual accounting for the military retirement 

system.) The payments from the services’ military personnel appropriations are assessed as a percentage of each 

member’s basic pay, known as the normal cost percentage. 

DoD established normal cost percentages of 34.3 for 

active-duty personnel and 24.3 for reserve personnel in

40. The elective deferral limit for 2012 is $17,000. However, under 

section 415(c) of the Internal Revenue Code, military personnel 

may exceed that limit if they are receiving pay under the combatzone tax exclusion. 

41. Department of Defense, Office of the Actuary, Valuation of the 

Military Retirement System, September 30, 2010 (January 2012), 

p. 24, http://go.usa.gov/vqZ. 

42. That calculation uses nominal discount rates of 17 percent per 

year for service members and 3 percent per year for the federal 

government’s borrowing costs. Estimated discount rates for service 

members are from John T. Warner and Saul Pleeter, “The Personal 

Discount Rate: Evidence from Military Downsizing Programs,” 

American Economic Review, vol. 91, no. 1 (2001), pp. 33–53.

43. The balance in the Military Retirement Fund is held in specialissue (nonmarketable) U.S. Treasury securities. That balance is an 

asset for the military retirement system but a liability for the rest 

of the federal government. Payments from the fund count as federal spending; the accrual contributions and payments from the 

Treasury to amortize the unfunded liability are intergovernmental 

transactions that have no net effect on federal outlays.
26 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Figure 5.

Annual Continuation Rates Among Active-Duty Enlisted Personnel, 2010

(Percent)

Source: Congressional Budget Office based on Department of Defense, Personnel and Readiness, Population Representation in the Military 

Services, Fiscal Year 2010 (2011), Table B-40, http://go.usa.gov/ye8.

Note: Continuation rates measure the proportion of personnel serving on active duty in the preceding year who are still in an active-duty 

status during the year in question.

2012.44 Thus, for example, an active-duty E-4 (corporal) 

with between 48 months and 72 months of service will 

earn basic pay of $27,200 in 2012, for which DoD will 

make an accrual payment of $9,330 (0.343 × $27,200).

If a retiree chooses the enhanced REDUX option, the 

Career Status Bonus of $30,000 is paid immediately out 

of the military personnel appropriation for the fiscal year 

in which the service member makes his or her decision. If 

the service member instead chooses the High-3 option, 

both the multiplier and the COLA that determine the 

retirement annuity are higher than they would have been 

had REDUX been implemented as conceived in 1986; 

the eventual costs will be higher as well, so larger accrual 

payments are made. Using data from DoD’s Office of the 

Actuary, CBO estimates that by 2017, the costs of the 

replacement for the REDUX system (the combined costs 

of the Career Status Bonus under the enhanced REDUX 

option and the larger accrual payments under the new 

High-3 option) will reach $2.3 billion (in 2013 dollars)—some 10 percent of the total retirement accrual 

and 1.6 percent of the projected MILPERS budget for 

that year.

The choice of a flat normal cost percentage for all active 

personnel is essentially arbitrary. Moreover, it has been 

argued that the current accrual system leads to an ineffective allocation of resources because, for example, marines 

are less likely than members of the other services to reach 

retirement, yet the Marine Corps must apply the accrual 

rate used by the other services when it prepares its annual 

budget. On the basis of its analysis of data for a cross 

section of enlisted personnel during 2010, CBO estimates that only 40 percent of Marine Corps recruits will 

remain on active duty after the first four years of service, 

compared with more than 50 percent of Army recruits 

and more than 60 percent of recruits in the Navy and the 

Air Force. 

0

20

40

60

80

100

Years of Service Completed

1 5 10 15 20 25 30

44. The quoted normal cost percentages do not include the additional 

amounts that are attributable to concurrent receipt—the fact that, 

since 2004, military retirement pay for some retirees is no longer 

reduced dollar for dollar by the amount of disability compensation those retirees receive from the Department of Veterans 

Affairs. The 2004 NDAA (P.L. 108-136, 117 Stat. 1515) requires 

that the Treasury, not DoD, make the accrual payments to fund 

concurrent receipt. See also Department of Defense, Valuation of 

the Military Retirement System, September 30, 2010 (January 

2012), p. 27, http://go.usa.gov/vqZ. 
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 27

CBO

By using the same demographic data on the military population and the same projections of continuation rates 

used by the Office of the Actuary, it would be possible to 

design accrual schedules in which the accrual rate varies 

with the member’s years of service. In particular, the 

accrual rates could be calibrated to reflect the fact that 

personnel with more seniority are more likely to remain 

in the military for the (fewer) additional years required to 

qualify for retirement. Decisions to increase the seniority 

mix of the force would then be tempered by the higher 

likelihood of incurring future retirement costs for those 

more senior personnel. However, such a system might be 

more cumbersome for the Office of the Actuary to maintain or for the military services to apply in their annual 

budgeting processes.

Projected Costs of Military Retirement

DoD’s Office of the Actuary has estimated that outlays 

from the Military Retirement Fund to current beneficiaries will total $51.7 billion during 2012. Outlays are 

expected to increase to about $55 billion by 2017 and to 

$59 billion by 2022 (all in 2012 dollars).45 Those estimates are based on a particular set of assumptions; even 

if the military’s retirement policy remains stable, actual 

outlays could differ from projections to the extent that 

economic variables (such as interest rates) or demographic variables (such as life expectancy) deviate from 

their assumed values. 

Policy changes would have additional effects. For example, if the military services changed their policies in ways 

that increased the seniority mix of their forces, more service members probably would complete the 20 years necessary to earn nondisability retirement benefits. Or if a 

series of larger-than-planned pay raises was given, there 

also would be an increase in service members’ High-3 

basic pay, which determines annuity values for new retirees. Either policy change would lead to larger outlays 

from the Military Retirement Fund. Although the effects 

on outlays would occur gradually over the long term as 

increasing numbers of service members reach retirement 

under the new policies, DoD’s Office of the Actuary 

would probably adjust the accrual rates in the short term.

Controlling the Costs of Military Retirement

Several proposals have been made for replacing the 

military’s current system with a defined-benefit plan that 

partially vests at earlier points in a service member’s 

career, or with a defined-contribution plan under which 

DoD would match a service member’s TSP contributions, or with a combination of those two plans. Those 

proposals could cost less or more than the current system, 

depending on how they were structured and implemented. They also would affect the seniority mix of the 

armed forces, potentially damping the incentive for service members in their second decade of service to stay for 

a full 20 years.46

A potential drawback of a change from a defined-benefit 

system to (at least partially) a defined-contribution system is that the financial risk shifts to retirees, whose 

resources in retirement are no longer guaranteed by the 

federal government but instead depend on returns available in financial markets. Moreover, reductions in federal 

outlays that stem from retirement reform would be 

delayed for 20 years if all current service members were 

retained in the current system, as was the case with the 

introduction of REDUX. However, if the defined-benefit 

plan were made less generous on balance, then DoD’s 

Office of the Actuary would probably reduce the accrual 

rates, and DoD would begin to see more immediate relief 

in the form of lower accrual payments to the Military 

Retirement Fund. DoD has not proposed any changes to 

its retirement system recently, but it has requested legislative language under which the Congress would establish a 

commission to review the retirement system and send 

recommendations to the President.47

45. Department of Defense, Valuation of the Military Retirement 

System, September 30, 2010 (January 2012), p. 30, 

http://go.usa.gov/vqZ. 

46. See Beth J. Asch and others, Assessing Compensation Reform: 

Research in Support of the 10th Quadrennial Review of Military 

Compensation (RAND Corporation, 2008), www.rand.org/pubs/

monographs/MG764.html. That report supports the policy 

options explored in Department of Defense, Report of the Tenth 

Quadrennial Review of Military Compensation, vol. 2, Deferred and 

Noncash Compensation (July 2008), http://go.usa.gov/y0s. For a 

more recent policy proposal, see Defense Business Board, Modernizing the Military Retirement System, Report FY11-05 (October 

2011), http://go.usa.gov/ynF.

47. Department of Defense, Fiscal Year 2013 Budget Request: 

Overview (February 2012), p. 5-5, http://go.usa.gov/ynJ.
28 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

The Military Health Care System

Health care as provided under TRICARE is a noncash 

benefit for active-duty and retired service members; in 

fact, it is the most significant (and costly) deferred noncash benefit for retirees. Over the next decade, the cost 

per capita of providing TRICARE benefits is projected to 

increase at a rate substantially greater than inflation. 

Costs could be reduced by making changes in enrollment 

fees, deductibles, copayments, or other aspects of the 

benefits.

TRICARE

TRICARE health benefits are provided by a coordinated 

effort of the medical commands of the Army, Navy, and 

Air Force, under the supervision of the Assistant Secretary 

of Defense for Health Affairs. TRICARE offers various 

options, some of which are similar to employer-based 

health insurance plans:

 TRICARE Prime operates much like a health 

maintenance organization (HMO); 

 TRICARE Extra is a preferred-provider network; 

 TRICARE Standard is similar to a traditional 

fee-for-service plan; 

 TRICARE Reserve Select is a premium-based health 

plan available to some members of the Selected 

Reserve and their families; and

 TRICARE for Life is a supplement for military 

retirees and their family members who also are eligible 

for Medicare. 

Not all of those plans are available to all categories of beneficiaries, however. All 1.4 million active-duty military 

personnel are automatically enrolled in TRICARE Prime. 

In 2011, 2.0 million of the 2.4 million eligible family 

members of active-duty personnel (84 percent) were 

enrolled in Prime, as were 1.6 million of the 3.5 million 

retirees and family members who were not yet eligible for 

Medicare (45 percent). The roughly 2 million retirees 

and family members who are eligible for Medicare are not 

eligible to enroll in Prime or to use Extra or Standard, but 

they do qualify for the TRICARE for Life benefit.48

Active-Duty Personnel and Their Family Members.

Active-duty military personnel receive all of their health 

care free of charge through TRICARE Prime, either at 

military medical treatment facilities (MTFs) or by 

referral from MTFs to civilian providers. CBO treats as 

compensation all of the costs for health care for activeduty personnel that are paid out of the base budget. CBO 

does not include in its tally any costs for medical care that 

are funded instead by the parallel budget for overseas 

contingency operations (see Box 4 on page 30).

Active-duty families may enroll in TRICARE Prime 

without paying an enrollment fee, and each enrollee is 

assigned a primary care manager—an individual provider 

or team of providers—either at an MTF or within the 

TRICARE network of civilian providers. All covered services are free to family members (with no deductibles or 

copayments other than for prescription drugs) as long as 

participants receive care either directly or by referral from 

the primary care manager. The civilian networks in the 

continental United States are managed under three 

regional contracts.49

Military Retirees and Their Family Members Who Are 

Not Yet Eligible for Medicare. Retired personnel who are 

not yet eligible for Medicare (generally people between 

the ages of 37 and 64) pay annual enrollment fees and 

copayments for most services. DoD has estimated that, in 

2011, a typical military retiree and his or her family 

enrolled in TRICARE Prime paid $420 in copayments 

and other fees in addition to the $460 enrollment fee, for 

a total cost of $880. By contrast, DoD estimated that a 

civilian in the general U.S. population who enrolled in a 

family HMO plan offered by an employer would typically pay $4,010 in premiums (not including any share 

paid by the employer); with deductibles and copayments 

that average $980, that family would pay a total of 

$4,990 over the course of the year. Thus, the family

48. Department of Defense, Evaluation of the TRICARE Program: 

Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), p. 16, http://go.usa.gov/de7.

49. Those contracts represent a consolidation over time from 

10 contracts originally. The first was awarded to Foundation 

Health Federal Services in March 1995 to cover Washington, 

Oregon, and six counties in northern Idaho. By June 1998, the 

entire country was under one contract or another.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 29

CBO

Table 4.

Average Annual Out-of-Pocket Costs for Military Retiree Families Under TRICARE 

Plans and for Civilian Counterparts with Employment-Based Insurance, 2011

(Dollars)

Source: Department of Defense, Evaluation of the TRICARE Program: Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), pp. 78 and 80, http://go.usa.gov/de7.

Note: HMO = health maintenance organization; PPO = preferred provider organization.

enrolled in TRICARE Prime would have total out-ofpocket costs that are about 18 percent of what a similar 

family would pay in a civilian HMO (see Table 4).50

A corollary of the lower deductibles and copayments 

(totaling $420 versus $980) is that TRICARE Prime 

enrollees use that system significantly more than comparable civilian beneficiaries use their health care systems. 

Including not only the retiree families described in this 

section but also active-duty families (who pay essentially 

no out-of-pocket costs), DoD estimates that the rates 

of use for inpatient, outpatient, and pharmacy services 

are much higher among Prime enrollees than among 

enrollees in civilian HMOs.51 DoD’s information is 

consistent with the results of studies of civilian health 

insurance showing that copayments, deductibles, and the 

restrictions of managed care can significantly decrease 

spending on health care. Those studies also show that, up 

to a point, increased cost sharing may reduce unnecessary 

use of health care without adversely affecting beneficiaries’ overall health.52

Military retirees are increasingly relying on TRICARE 

as the primary source of health care coverage for their 

families. The migration of retirees from private health 

insurance to TRICARE is one contributor to the rapid 

increase in TRICARE spending in the past decade. The 

family enrollment fee for TRICARE Prime, while 

remaining fixed at a nominal value of $460 per year, 

declined in real terms (accounting for inflation) by 

21 percent between 2001 and 2011. (As of October 1, 

2011, annual enrollment fees for new enrollees were 

boosted to $260 for singles and $520 for families; the 

enrollment fees for all enrollees will be set at those 

amounts plus an inflation adjustment starting October 1, 

2012. See Appendix C for the legislative history of the 

TRICARE benefit.) At the same time, the average 

employee’s share of the family premium for an 

TRICARE Prime 460 420 880

Civilian HMO 4,010 980 4,990

TRICARE as a percentage of civilian plan — — 18

TRICARE Standard or Extra 0 1,000 1,000

Civilian PPO 4,020 1,360 5,380

TRICARE as a percentage of civilian plan — — 19

Premium or Deductibles and Total Annual

Enrollment Fee Copayments Out-of-Pocket Costs

50. Department of Defense, Evaluation of the TRICARE Program: 

Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), p. 78, http://go.usa.gov/de7. An independent 

source shows amounts similar to those estimated by DoD and 

reported here; see Kaiser Family Foundation and Health Research 

and Educational Trust, Employer Health Benefits: 2011 Annual 

Survey (September 2011), http://ehbs.kff.org/pdf/2011/8225.pdf. 

According to that report, the average employee’s share of a family 

HMO premium was $4,148 in 2011 (p. 76). The average annual 

deductible among HMO plans with an aggregate family deductible (as opposed to plans with separate amounts for each family 

member and a limit on the number of family members required to 

reach that amount) was $1,487 (p. 106). The latter amount only 

approximates DoD’s estimate of $980 that the average family paid 

toward its deductible and copayments because some families do 

not reach the annual deductible whereas others surpass it.

51. Department of Defense, Evaluation of the TRICARE Program: 

Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), pp. 62, 67, and 72, http://go.usa.gov/de7.

52. See W. Manning and others, “Health Insurance and the Demand 

for Medical Care: Evidence from a Randomized Experiment,” 

American Economic Review, vol. 77, no. 3 (1987), pp. 251–277; 

and R. Brook and others, “Does Free Care Improve Adults’ 

Health? Results from a Randomized Controlled Trial,” New England Journal of Medicine, vol. 309, no. 23 (1983), pp. 1426–1434.
30 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

employment-based insurance plan in the private sector 

increased by 80 percent in real terms.53 Concurrent with 

those developments, the proportion of military retirees 

with private health insurance dropped by half, from 

about 50 percent to 25 percent, and the proportion 

enrolled in TRICARE Prime increased from about 

30 percent to 50 percent. (The remaining one-quarter 

of retirees had neither private health insurance nor were 

enrolled in TRICARE Prime, although many relied on 

TRICARE Standard or Extra or had access to other federal programs.) DoD estimates that about 730,000 more 

retirees and family members under age 65—some 45 percent of the 1.6 million enrollees in that category—now 

rely primarily on TRICARE Prime (and not private 

health insurance) than would be the case if the relative 

premiums and out-of-pocket costs in the two sectors 

remained as they were in 2001.

Military retirees under the age of 65 who do not choose 

to enroll in TRICARE Prime may receive benefits under 

Box 4.

Incremental Health Care Costs Related to Combat

Some medical care currently provided by the 

Department of Defense (DoD) consists of treatment 

for combat injuries and other conditions associated 

with deployment, and some of that care is funded not 

in DoD’s base budget but rather in its budget for 

overseas contingency operations. Although the 

Congressional Budget Office (CBO) does not 

include the incremental costs for wartime medical 

care in the agency’s definition of military compensation, at least some of those costs represent noncash 

compensation that is conceptually equivalent to cash 

pay for hazardous duty, which is included in the definition. (The analysis in this study includes only the 

health care provided by DoD while service members 

are on active duty; it excludes the care provided by 

the Department of Veterans Affairs to members who 

have left the service.)

It is difficult to comprehensively estimate the amount 

that DoD spends on wartime medical care. Some of 

that care—provided at mobile field hospitals and 

aboard hospital ships, for example—is under the 

jurisdiction of the Army, Navy, and Air Force medical 

commands rather than the centralized Defense 

Health Program, and it is not readily identifiable 

in the budget documents of the various service 

branches.

Incremental care under the jurisdiction of the 

Defense Health Program has several other elements:

 Transport of service members from Landstuhl 

Regional Medical Center in Germany (the staging 

area for evacuation from Iraq or Afghanistan) to 

the United States,

 Treatment of combat injuries at military treatment 

facilities in the United States,

 Hiring of civilian and contractor personnel at U.S. 

treatment facilities to cover for military personnel 

who are deployed,

 Administration of pre- and postdeployment 

medical examinations, and

 Provision of medical and dental care to members 

of the reserves and the National Guard who are 

mobilized for wartime deployment and who otherwise would not be eligible to receive free care.

The Defense Health Program budget request for 

2013 included $1.0 billion for operation and maintenance costs associated with combat operations.1

 CBO 

does not include those costs in its tally of military 

compensation, which is restricted to costs paid out of 

the base budget.

1. Department of Defense, Defense Health Program, Fiscal Year 

(FY) 2013 Budget Estimates—Operation and Maintenance, 

Procurement, Research, Development, Test and Evaluation, 

vol. 1, Justification of Estimates (February 2012), pp. 132–

135, http://go.usa.gov/p5q.

53. Department of Defense, Evaluation of the TRICARE Program: 

Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), pp. 76–77, http://go.usa.gov/de7.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 31

CBO

TRICARE Extra or Standard without paying an enrollment fee, and they are eligible for space-available care at 

MTFs. Participants in TRICARE Extra or Standard must 

pay an annual outpatient deductible of $150 (for single 

coverage) or $300 (for family coverage). During 2011, 

a typical family in those plans paid about $1,000 in 

TRICARE deductibles and copayments, whereas a civilian family in an employment-based preferred-provider 

plan would typically pay $4,020 in premiums (not 

including the share paid by the employer) and, including 

deductibles and copayments that average $1,360, a total 

of $5,380 over the course of the year. Thus, the family 

that relies on TRICARE Extra or Standard would pay 

total out-of-pocket costs that are about 19 percent of 

what a civilian family would pay in a preferred-provider 

plan (see Table 4).54

DoD pays for health care provided to non-Medicareeligible retirees and their family members contemporaneously; the department does not make accrual payments to 

fund future costs for that beneficiary group.

Military Retirees and Their Family Members Who Are 

Eligible for Medicare. In 2002, DoD introduced a new 

benefit, TRICARE for Life, to supplement Medicare for 

military retirees and their family members who also are 

eligible for Medicare (a group known as dual-eligibles).55

Before TFL was created, retirees and their families would 

lose access to the civilian portion of their TRICARE benefits once they became eligible for Medicare, although 

they retained their eligibility for in-house care at MTFs 

(so long as there was space available) and access to free 

prescription drugs dispensed by MTF pharmacies. Several military retirees filed lawsuits against the federal 

government, claiming variously that they had been promised low-cost or free health care for the remainder of 

their lives; that they were entitled to receive that care at 

military treatment facilities; and that if such care was not 

available at MTFs, the federal government was obliged to 

purchase that care on their behalf from the private sector. 

The courts consistently ruled that, although military 

recruiters may have enticed recruits with promises of 

free lifetime medical care, those promises did not bind 

the military to provide such care; only the Congress and 

the President could establish permanent health care benefits. (See Appendix D for a discussion of whether DoD 

was legally bound to provide military personnel with lowcost health care in retirement.) Lawmakers then acted to 

establish TFL.

With the introduction of TFL, TRICARE became the 

second payer to Medicare for those beneficiaries. Dualeligibles now must enroll and pay the monthly Medicare 

Part B premium to remain eligible for TRICARE. (Medicare Part B covers doctors’ services, outpatient care, home 

health services, and other medical services including some 

preventive services.) Having done so, when people in that 

group receive medical services that are covered by both 

Medicare and TRICARE, Medicare pays the portion of 

the service’s cost allowed under its rules, and TRICARE 

pays most, if not all, of the Medicare deductibles and 

coinsurance. When dual-eligibles receive medical services 

that are covered by TRICARE but excluded by Medicare, 

TRICARE covers most of the costs, although beneficiaries may still be responsible for some cost sharing.

As of April 1, 2001, beneficiaries who are at least age 65 

are eligible for the full TRICARE pharmacy benefit if 

they also are enrolled in Medicare Part B; otherwise, their 

drug benefits are limited to the prescriptions available at 

MTF pharmacies. Medicare-eligible beneficiaries also can 

enroll in prescription drug plans under Medicare Part D, 

but they need not enroll in such a plan to exercise their 

TRICARE pharmacy benefits. No copayments are 

assessed for formulary drugs (generic and brand-name 

drugs that DoD encourages its clinicians to prescribe and 

that it provides to beneficiaries free or at a reduced outof-pocket cost) dispensed at MTF pharmacies or for 

formulary generic drugs obtained by mail order; other 

types of drugs (including all drugs obtained from retail 

pharmacies) entail modest copayments.56

During fiscal years 2000 and 2001—just before the 

introduction of TFL—88 percent of Medicare-eligible

54. Ibid., p. 80. Again, similar amounts were reported elsewhere. See 

Kaiser Family Foundation and Health Research and Educational 

Trust, Employer Health Benefits: 2011 Annual Survey (September 

2011), http://ehbs.kff.org/pdf/2011/8225.pdf. According to that 

source, the average employee’s share of a family PPO premium 

was $4,072 in 2011 (p. 76). The average annual deductible 

among PPO plans with an aggregate family deductible (as 

opposed to plans with separate amounts for each family member 

and a limit on the number of family members required to reach 

that amount) was $1,521 (p. 106), which approximates DoD’s 

estimate of $1,360 in deductibles and copayments.

55. Sections 712 and 713 of the Floyd D. Spence National Defense 

Authorization Act for Fiscal Year 2001 (P.L. 106-398, 114 Stat. 

1654A–176).

56. Department of Defense, TRICARE Pharmacy Program Handbook

(September 2011), http://go.usa.gov/YEeF. 
32 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Table 5.

DoD’s Funding Request for the 

Defense Health Program, 2013

Source: Congressional Budget Office.

Notes: All entries are for the base budget only and exclude 

additional funding requested for overseas contingency 

operations. 

DoD = Department of Defense; MERHCF = MedicareEligible Retiree Health Care Fund.

military retirees purchased Medicare supplemental insurance (in addition to Medicare Part B) or were covered 

by Medicaid. By “wrapping around” the Medicare benefit, TFL would seem to make it unnecessary for those 

families to continue to pay for Medicare supplemental 

insurance. Although purchases of supplemental insurance 

have fallen precipitously, DoD reports that as recently as 

2011, almost 20 percent of dual-eligible families still purchased either a Medicare supplement (apart from TFL) or 

used some other alternative to the combination of Medicare and TFL. Those families continued to purchase such 

policies perhaps because they were unaware of or lacked 

confidence in the TFL benefit or because they wanted 

to have overlapping coverage.57Another possible explanation is that some participants might be Medicare-eligible 

military retirees who are still employed in the civilian 

sector and choose to retain employment-based family 

coverage in order to continue coverage for a spouse who is 

not yet eligible for Medicare; dropping an employmentbased plan in favor of a combination of Medicare and 

TFL could leave those spouses without any ready source 

of medical insurance.

Military Reserve Personnel. Members of the reserves and 

National Guard become eligible for TRICARE and 

receive the same benefits as active-duty service members 

when they are activated (called or ordered to active duty 

for more than 30 consecutive days). They also may qualify for up to 180 days of a “preactivation benefit” if they 

receive advance orders to report to active duty at a future 

date.

Some members of the Selected Reserve may enroll in 

the TRICARE Reserve Select program. DoD sets the 

premium equal to 28 percent of the actuarial cost of coverage, and it updates that premium annually on the basis 

of the program’s costs during the preceding calendar year. 

Members of the Retired Reserve who are qualified for a 

nonregular (deferred) retirement but have not reached 

age 60 are eligible for the TRICARE Retired Reserve program, but they must pay 100 percent of the actuarial cost 

of their coverage; there is no government subsidy.

Projected Costs of the Military Health Care System

The largest element in DoD’s $48 billion request for the 

Defense Health Program in 2013 is $32 billion in O&M 

funding: $14.1 billion for direct care provided in MTFs 

and other administrative activities, $14.2 billion for 

purchased care and contracts, and $3.8 billion for pharmaceuticals (see Table 5). Although they are not shown 

separately, the costs of pay and benefits for the 60,000 

full-time-equivalent civilian employees who are assigned 

to the military health care system to provide health care 

and administrative services are included in the O&M 

total in Table 5. In addition, DoD plans to assign some 

86,000 military personnel to the military health care system; the cost of their pay and benefits—$8.2 billion—

would be collectively borne by the MILPERS accounts of 

the Army, Navy, and Air Force.58 DoD also requested 

57. Department of Defense, Evaluation of the TRICARE Program: 

Access, Cost, and Quality, Fiscal Year 2012 Report to Congress

(February 2012), p. 82, http://go.usa.gov/de7.

Billions of

Dollars

Military Personnel

Pay and allowances of medical personnel 8.2

Accrual payments into the MERHCF 6.7 ____

Subtotal 14.9

Operation and Maintenance

Direct care at military medical treatment facilities

and administrative costs 14.1

Purchased care and contracts 14.2

Pharmaceuticals 3.8 ____

Subtotal 32.0

Military personnel and 

operation and maintenance 46.9

Procurement 0.5

Research, Development, Test, and Evaluation 0.7 ____

Total, Defense Health Program 48.1

58. Department of Defense, Defense Health Program, Fiscal Year (FY) 

2013 Budget Estimates, Operation and Maintenance, Procurement, 

Research, Development, Test and Evaluation, vol. 1, Justification of 

Estimates (February 2012), pp. 16 and 56–57, http://go.usa.gov/

p5q; and Department of Defense, Fiscal Year 2013 Budget Request, 

Overview (February 2012), p. 5-2, http://go.usa.gov/ynJ. 
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 33

CBO

funding for health care of less than $1 billion each for the 

procurement and RDT&E appropriations.

Finally, in 2013, DoD plans to contribute $6.7 billion 

from the MILPERS accounts into the Medicare-Eligible 

Retiree Health Care Fund to account for the future 

health care of current service members. DoD projects 

that the cost for the department to provide health care to 

Medicare-eligible retirees and their families will exceed 

the accrual contribution. Specifically, DoD anticipates 

outlays of $9.7 billion from the MERHCF in 2013 to 

reimburse TRICARE providers and MTFs for care 

delivered to that group of beneficiaries.

DoD has set annual accrual rates for the MERHCF of 

about $4,400 for active-component personnel and 

$2,400 for reserve-component personnel for 2013. Those 

rates are roughly $1,000 less than prevailing rates in 2012 

because of two recent policy changes and one adjustment 

to the economic assumptions of DoD’s Office of the 

Actuary. Specifically, DoD achieved full implementation 

of a program to collect rebates from drug manufacturers 

at retail pharmacies, and it implemented section 708 of 

the 2012 NDAA, which places certain limitations on 

enrollment of military retirees in the Uniformed Services 

Family Health Plan.59 Also, during 2011, the Office of 

the Actuary lowered its estimate of the nominal growth 

rate in per capita medical spending for dual-eligibles, 

from 6.25 percent to 5.75 percent per year.

As part of its budget request for 2007, DoD made a set 

of proposals that it labeled “Sustain the Benefit” that 

increased the amount beneficiaries would pay out of 

pocket for medical care; the department subsequently 

submitted amended versions of that plan in its 2008 and 

2009 budget requests. The 2009 proposal would have 

substantially increased the annual enrollment fee for 

TRICARE Prime for military retiree families who were 

not yet eligible for Medicare, increased various copayments under TRICARE Prime, instituted an annual 

enrollment fee for TRICARE Extra or Standard, and 

increased the annual family deductible under TRICARE 

Extra or Standard. All of the Sustain the Benefit proposals 

were blocked by Congressional action (see Appendix C 

for more details).

DoD’s budget requests for 2010 and 2011 did not call for 

higher TRICARE fees, but the 2012 request led to an 

increase—from $460 to $520 per year—in the family 

enrollment fee for TRICARE Prime. DoD’s budget 

request for 2013 reprises several aspects of its earlier 

Sustain the Benefit proposals:

 Institute an annual fee for Medicare-eligible military 

retirees who enroll themselves or their families in TFL;

 Increase the annual fee that military retirees who are 

not yet eligible for Medicare pay to enroll themselves 

or their families in TRICARE Prime;

 Institute an annual fee for non-Medicare-eligible 

military retirees to enroll themselves or their families 

in TRICARE Standard or Extra;

 Increase the annual deductibles for non-Medicareeligible military retirees who enroll themselves or their 

families in TRICARE Standard or Extra; and

 Adjust the pharmacy copayments for active-duty 

family members and for retirees and their families as 

an incentive to purchase mail-order and generic 

drugs.60

DoD estimated that, over the period from 2013 through 

2017, those initiatives could save $5.5 billion in the 

department’s O&M appropriation and $7.4 billion in 

accrual payments into the MERHCF. The House of 

Representatives’ version of the 2013 NDAA rejects 

DoD’s proposal.61 The full Senate has not yet voted on its 

version of that NDAA.

CBO has projected DoD’s health care costs through 

2022. CBO based its projections of costs in part on average growth rates within the military health care system 

between 2006 and 2011, which, in most categories, have 

been significantly higher than the corresponding rates in 

the national economy. For example, DoD’s spending per 

user for purchased care and for direct care at MTFs 

increased at real rates of 4.2 percent and 3.2 percent per 

year, respectively, compared with a national average of 

1.3 percent per year for a comparable composite category 

59. The Uniformed Services Family Health Plan, a variant of 

TRICARE Prime, is available to family members of active-duty 

service members and to military retirees and their family members 

in six narrowly defined geographic regions.

60. Department of Defense, Fiscal Year 2013 Budget Request: 

Overview (February 2012), pp. 5-2 to 5-5, http://go.usa.gov/ynJ.

61. See H. Res. 661, National Defense Authorization Act for Fiscal 

Year 2013, Section 4501 (passed on May 17, 2012).
34 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

Figure 6.

Projected Costs of the Military Health System

(Billions of 2013 dollars)

Source: Congressional Budget Office, Long-Term Implications of the 2013 Future Years Defense Program (July 2012).

Note: TFL = TRICARE for Life.

of hospital care and physician and clinical services in the 

broader economy.62 However, CBO does not view the 

faster growth rates within military health care as likely to 

continue unabated. Instead, CBO expects DoD’s costs to 

decelerate, eventually reaching a growth rate in 2030 (a 

year that is beyond the horizon of the current analysis) of 

around 1 percentage point above the growth of per capita 

GDP, an assumption that is roughly consistent with estimates in CBO’s The 2012 Long-Term Budget Outlook.

63

DoD requested $48 billion for the military health system 

in 2013, but lawmakers have a long history of denying 

the department’s requests to increase out-of-pocket costs 

paid by TRICARE beneficiaries. Therefore, CBO used 

the assumption that DoD’s proposed fee increases would 

not take effect and thus would produce no savings, and 

the agency’s projection is for health care costs of $51 billion in 2013. CBO projects that health care costs will rise 

to $65 billion (in 2013 dollars) by 2017, reflecting an 

average real growth rate of 6.0 percent per year over the 

next five years (see Figure 6). (In contrast, DoD projected 

that the average real growth rate would be about 2.6 percent during the same period.) The 6.0 percent real 

growth rate embodies several effects beyond the growth 

rates in annual spending per user for certain medical services delineated above. CBO projects that spending on 

other categories of care, such as pharmaceuticals, will 

increase more rapidly than spending on patient care. 

Also, because the enrollment fees and copayments under 

TRICARE remain below the amounts that many military 

retirees would pay under their employment-based insurance plans, CBO projects that the number of retirees who 

will choose to enroll in TRICARE Prime will continue to 

increase (albeit slowly) for several years into the future, 

adding still more to the total costs for that group.

CBO projects that the faster cost growth within DoD 

will taper off in the second half of the next decade, averaging 3.4 percent per year between 2017 and 2022. That 

rate implies an overall average rate of growth between 

2013 and 2022 of 4.6 percent per year, in turn implying 

that military health care costs will reach $77 billion by 

2022.

2013 2016 2019 2022

0

10

20

30

40

50

60

70

80

Pharmaceuticals

Purchased Care and Contracts

Direct Care and Administration

Military Personnel

TFL Accrual Payments

62. The DoD growth rates are from Congressional Budget Office, 

Long-Term Implications of the 2013 Future Years Defense Program

(July 2012), pp. 20–23. The economywide growth rate was 

reported by the Centers for Medicare and Medicaid Services.

63. See Congressional Budget Office, The 2012 Long-Term Budget 

Outlook (June 2012), p. 53.
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 35

CBO

Controlling the Costs of Military Health Care

Several proposals have been made for controlling the 

costs of military health care by raising enrollment fees, 

deductibles, or copayments. Depending on the details, 

those proposals could save DoD as much as $10 billion 

per year.

Higher enrollment fees mean larger collections by the 

government, and they also could encourage some retiree 

families to turn to employment-based health plans, which 

would save money for the government. Higher deductibles and copayments could lower the government’s costs 

both by encouraging participation in employment-based 

plans and by trimming the use of medical services among 

the remaining TRICARE participants. 

CBO estimated that the 2009 Sustain the Benefit proposal, if enacted, would have reduced DoD’s spending by 

$5 billion in 2011, the third year covered by the proposal 

and the first year in which all fees would have reached 

their new (higher) amounts.64 In the past, CBO has estimated that DoD could reduce its spending on military 

health care by increasing the out-of-pocket costs paid by 

military retirees who are not yet eligible for Medicare 

(saving $10 billion in outlays over 5 years and $28 billion 

over 10 years) or by precluding that same group from 

enrolling in TRICARE Prime altogether, allowing them 

instead to pay to enroll in TRICARE Standard or 

Extra (saving $37 billion in outlays over 5 years and 

$105 billion over 10 years).65

64. See Congressional Budget Office, The Effects of Proposals to 

Increase Cost Sharing in TRICARE (June 2009), p. 16.

65. See Congressional Budget Office, Reducing the Deficit: Spending 

and Revenue Options (March 2011), pp. 78–81.

APPENDIX

CBO

A

Enhancements to the 

Military Retirement System

Enacted Since 2000

The National Defense Authorization Act for Fiscal 

Year 2000 (NDAA, Public Law 106-65) gave military 

personnel a choice between the “High-3” retirement plan 

and an enhanced REDUX retirement plan. Military 

personnel who chose the latter plan could retire after 

20 years of service at 40 percent of their basic pay and 

receive partial insulation from inflation (the High-3 

plan offered a 50 percent annuity and full inflation protection); they also would receive a $30,000 lump-sum 

payment during their 15th year of service.1

 Four other 

components of military retirement have changed as a 

result of legislation enacted since 2000:

 The Social Security offset for the Survivor Benefit 

Plan has been eliminated,

 Certain reservists are now eligible to receive retirement 

pay before reaching the age of 60—the age to which 

that pay had previously been deferred, 

 The rules regarding concurrent receipt of disability 

and retirement benefits have been changed, and

 The cap on the multiplier for regular military 

retirement pay has been raised.

Survivor Benefit Plan

Military retirees can elect to pay a premium that will 

allow their surviving spouses to continue to receive a 

portion of their retirement pay. In the past, once the surviving spouse reached the age of 62 and became eligible 

for Social Security benefits, payments under the Survivor 

Benefit Plan were cut from 55 percent to 35 percent of 

the retirement pay that the service member would have 

received. However, the 2005 NDAA (P.L. 108-375, 

section 644) phased out the reduction in payments below 

55 percent of retirement pay; implementation was spread 

over five increments beginning on October 1, 2005, and 

ending on April 1, 2008.2

Early Receipt of Retirement Pay by 

Certain Reservists 

The 2008 NDAA (P.L. 110-181, section 647) changed 

the ages at which some reservists who have served in Iraq, 

Afghanistan, and elsewhere become eligible to receive 

retirement pay.3

 Regular active-duty military personnel 

qualify for full retirement benefits after 20 years of service, regardless of age. By contrast, most reservists with 

20 years of qualifying service must wait until reaching 

the age of 60 to receive retirement pay and health care 

benefits. 

The 2008 NDAA created a new formula to allow some 

retired reservists to receive retirement pay before reaching 

age 60. Specifically, for every 90 days within a fiscal year 

that a reservist is on active duty or performs active service, 

the traditional eligibility age is reduced by three months. 

Although the period of service need not be continuous, 

credit is given only in 90-day increments. So a reservist 

who serves a six-month tour (180 days) may draw retirement pay at age 591⁄2 instead of waiting until age 60 (and 

if the tour lasts 200 days, the reservist would still draw 

retirement pay at 591⁄2). 

1. Sections 641 through 644 of the 2000 NDAA (P.L. 106-65, 

113 Stat. 662–664 (1999)). 

2. 10 U.S.C. §1451 (2006 & Supp.).

3. 10 U.S.C. §12731 (2006 & Supp.).
38 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

The provision applies only to reservists who are activated 

under the statutory authorities specified in the 2008 

NDAA and to service that occurred after the law’s 

enactment on January 28, 2008. No reservist may receive 

retirement payments before age 50; the earliest age of 

eligibility for medical benefits remains at 60.

Concurrent Receipt 

Through calendar year 2003, military retirement pay 

was reduced dollar for dollar by the amount of disability 

compensation a retiree received from the Department of 

Veterans Affairs. (Many eligible retirees still chose to 

receive disability compensation because those benefits are 

not subject to federal income taxes.) As a result of successive pieces of legislation, starting with the 2003 NDAA 

(P.L. 107-314), several classes of retired military personnel now can receive military retirement pay without any 

offset for compensation for service-connected disabilities. 

For example, under a program that will be fully phased in 

by January 2014, retirees with 20 or more years of service 

who are rated at least 50 percent disabled will face no 

offset between the two benefits.4

 The 2004 NDAA 

(P.L. 108-136) further requires that the U.S. Treasury, 

rather than the Department of Defense, make the accrual 

payments to fund concurrent receipt.5

 The Treasury 

made accrual payments of $4.8 billion in 2011, an 

amount projected by the Office of the Actuary in the 

Department of Defense to grow to $5.6 billion (in 2012 

dollars) by 2017.6

The Cap on the Multiplier for 

Regular Retirement 

The 2007 NDAA (P.L. 109-364) lifted the cap on the 

multiplier, which had been set at 75 percent of basic pay, 

that is used to set the annuity amount for nondisability 

retirement from the active military.7

 The multiplier for 

most active military personnel who retired after December 31, 2006, was reset at 2.5 percent times the years of 

service credited—without the cap—so that very senior 

personnel (those with more than 30 years of service) 

could retire at more than 75 percent, and conceivably at 

more than 100 percent, of the average of their highest 

36 months of basic pay (the High-3). Also, section 601 of 

the same law modified the basic pay table to include longevity increases for continued service into the fourth 

decade for very senior enlisted personnel (E-9, the highest 

pay grade), warrant officers (W-5, the highest rank), and 

commissioned officers (O-8 through O-10, or two-star 

through four-star generals and admirals). Those longevity 

increases were perpetuated in subsequent across-theboard increases to the basic pay table.

4. The rules for concurrent receipt have been relaxed successively in 

section 636 of the 2003 NDAA (P.L. 107-314, 10 U.S.C. §1413a 

(2006)), as amended by section 642 of the 2004 NDAA 

(P.L. 108-136, 117 Stat. 1516) and section 641 of the 2008 

NDAA (P.L. 110-181, 122 Stat. 156).

5. P.L. 108-136, codified at 10 U.S.C. §1466(b)(2)(D), Payments 

into the [Military Retirement] Fund.

6. Department of Defense, Valuation of the Military Retirement 

System, September 30, 2010 (January 2012), p. 30,

http://go.usa.gov/vqZ. 

7. 120 Stat 2259, 10 U.S.C. §1409(b) (2006 & Supp.).
APPENDIX

CBO

B

Accrual Accounting for the

Military Retirement System

Accrual accounting is a method of accounting 

in which revenues are recognized in the period earned 

and costs are recognized in the period incurred, regardless 

of when payment is received or made.1

 Proponents 

assert that accrual accounting leads to better-informed 

decisionmaking because the full costs of a policy become 

apparent during the year in which that policy is adopted. 

If an increase in the number of military personnel is 

under consideration, for example, the full costs—

including the future retirement costs of those additional 

personnel—become part of the decision calculus.

On October 1, 1984, the Department of Defense (DoD) 

adopted accrual accounting for the military retirement 

system. The Military Retirement Fund was established 

“in order to finance on an actuarially sound basis liabilities of the Department of Defense under military retirement and survivor benefit programs.”2

The flows of money into the fund come from several 

sources:

 Amounts paid into the fund by DoD or by the 

U.S. Treasury;

 Any amount appropriated to the fund; and

 Any return on the assets of the fund, which are 

invested in U.S. Treasury securities.

Payments out of the fund are made to military retirees 

and their survivors. Although participants in the other 

uniformed services—including members of the Coast 

Guard, officers of the Public Health Service, and officers 

of the National Oceanic and Atmospheric Administration—are covered under retirement systems that are 

similar to that of DoD, those systems are separate from 

the Military Retirement Fund.

Not all payments into the fund are made by DoD. The 

National Defense Authorization Act for Fiscal Year 2004 

requires that the Treasury, rather than DoD, make the 

accrual payments to fund concurrent receipt—the ability 

of several classes of retired military personnel to receive 

military retirement pay without any offset for payments 

they receive from the Department of Veterans Affairs in 

compensation for service-connected disabilities.3

 Thus, 

under a program that will be fully phased in by January 

2014, retirees with 20 or more years of service who are 

rated at least 50 percent disabled will face no offset 

between the two benefits.

The balance in the Military Retirement Fund is held in 

special-issue (nonmarketable) Treasury securities. The 

Secretary of the Treasury determines the interest rates for 

those securities, taking into consideration current yields 

for marketable Treasury securities of comparable maturity. The balance in the fund is an asset for the military 

retirement system but a liability for the rest of the federal 

government. As such, it is a measure of the amount that 

the government has the legal authority to spend on military retirement payments under current law, although it 

has little relevance in an economic or budgetary sense. 

Payments from the fund to beneficiaries count as federal 

spending; the accrual contributions and the amortization 

1. Department of Defense, DoD Financial Management Regulation, 

DoD 7000.14-R, Volume 4, Chapter 10, http://go.usa.gov/YEu5. 

2. 10 U.S.C. §1461 (2006 & Supp.), Establishment and purpose of 

[Military Retirement] Fund; definition.

3. Section 641 of the National Defense Authorization Act for Fiscal 

Year 2004 (Public Law 108-136, 117 Stat. 1515), codified at 

10 U.S.C. §1466(b)(2)(D) (2006 & Supp.), Payments into the 

[Military Retirement] Fund.
40 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

payments from the Treasury are intergovernmental 

transactions that have no net effect on federal outlays.

When accrual accounting began, no funds had been set 

aside for service members who had already retired, and 

many who were serving at the time remained in the 

military long enough to retire. Starting in 1985, DoD 

made accrual payments on behalf of that latter group, but 

the payments started too late to fully fund the group’s 

retirement benefits (including survivors’ benefits). The 

Treasury makes accrual payments to fund the remaining 

liability for that group plus the liability for service members who had already retired by 1985. DoD estimated the 

initial unfunded liability at $529 billion (in 1984 dollars) 

as of September 30, 1984.4

 That balance could have been 

amortized in several ways. DoD’s Board of Actuaries at 

first determined that it could amortize the unfunded 

liability by making 60 annual payments, each equal to 

33 percent of the total DoD had spent on basic pay in 

1983. On several subsequent occasions, in light of 

legislative changes to retirement benefits and changes in 

economic assumptions, the board revised the payment 

amounts and the period over which the unfunded liability would be amortized.5

 As of September 30, 2010, the 

unfunded liability stood at $904 billion (in 2010 dollars).

However, the payment schedule is fundamentally arbitrary, so flows into the fund do not provide a useful 

measure of how much military retirement is costing the 

federal government in a given year. DoD’s Office of the 

Actuary reports that outlays from the Military Retirement Fund totaled $50.8 billion during 2011. On the 

other side of the ledger, flows into the fund consisted of 

$19.8 billion from DoD, $4.8 billion from the Treasury 

to cover payments to military retirees under concurrent 

receipt, $61.4 billion from the Treasury toward amortizing the unfunded liability, and investment income of 

$21.4 billion (in all, $107.4 billion).6

 The size of the 

Treasury’s amortization payment—the largest single flow 

into the fund and more than half of the total—is an 

artifact of the current plan to fully amortize the unfunded 

liability by 2025. A faster amortization schedule would 

require a larger annual contribution from the Treasury, 

and a slower schedule would require a smaller annual 

contribution. 

The distinction between outlays from the Military Retirement Fund and flows into the fund is not always clear in 

policy discussions of the military retirement system. For 

example, the Defense Business Board—an internal advisory panel within DoD—has issued a study on the military retirement system that proposes use of the total 

inflow of $107.4 billion as a metric for comparing the 

current defined-benefit system with an alternative 

defined-contribution system.7

 Yet the emphasis on 

flows into the fund rather than outlays from the fund 

turns attention away from federal spending. Furthermore, the Treasury’s amortization payment depends on a 

policy decision regarding the length of the amortization 

schedule that is separable from the fundamental question 

of whether the current defined-benefit system is a costeffective vehicle for delivering retirement benefits to 

military personnel and their survivors.

4. Department of Defense, Valuation of the Military Retirement 

System, September 30, 2010 (January 2012), p. 24, 

http://go.usa.gov/vqZ. 

5. Ibid., p. 25.

6. Ibid., p. 30.

7. Defense Business Board, Modernizing the Military Retirement 

System, Report FY11-05 (October 2011), Tab C, pp. 10 and 20, 

http://go.usa.gov/ynF. 
APPENDIX

CBO

C

Legislative History of

Cost Sharing in TRICARE

Patients in TRICARE, the military health care program, generally pay smaller shares of the costs of their 

care than do participants in most employment-based 

insurance plans. In recent years, lawmakers have blocked 

the attempts by the Department of Defense (DoD) to 

increase cost sharing by patients in an effort to control 

the costs of the program. 

The fee for enrolling in TRICARE Prime (which operates 

like a health maintenance organization) charged to military retirees who are not yet eligible for Medicare was 

fixed at $230 per year for individual service members and 

at $460 per year for families from 1995 until October 1, 

2011, when the fees for new enrollees were raised to $260 

and $520, respectively (starting October 1, 2012, all 

enrollees pay those amounts plus an inflation adjustment). Moreover, out-of-pocket expenses have been 

reduced over time in two areas. The Floyd D. Spence 

National Defense Authorization Act (NDAA) for Fiscal 

Year 2001 (Public Law 106-398, section 752) eliminated 

outpatient copayments for active-duty family members 

under TRICARE Prime that had been $6 for the families 

of junior enlisted personnel (pay grades E-4 and below) 

and $12 for all others. Section 759 of the same legislation 

reduced the catastrophic cap (the maximum out-ofpocket liability per family for copayments, cost sharing, 

and deductibles over the course of a fiscal year) under 

TRICARE Standard from $7,500 to $3,000 for retirees, 

survivors, and former spouses.

At various times, DoD has proposed increasing out-ofpocket costs for military retirees who are not yet eligible 

for Medicare. The first proposal came in February 2006, 

in the form of a program, Sustain the Benefit, that was 

part of DoD’s budget request for 2007. DoD submitted 

amended versions of that plan in its budget requests for 

2008 and 2009. Several provisions of the 2009 proposal 

would have affected military retirees who were not yet eligible for Medicare:

 The annual enrollment fee for TRICARE Prime 

would have increased from $460 per family to an 

amount between $1,100 and $2,140 (in three tiers, 

on the basis of the amount of retirement pay) over a 

three-year adjustment period, and fees thereafter 

would have been indexed to the annual growth rate 

in the military’s health care costs;

 The charge for office visits would have risen (from 

$12 to $28), as would various other copayments 

under TRICARE Prime, and all would be adjusted 

again for inflation every five years;

 For the first time, annual enrollment fees would be 

assessed for TRICARE Extra (which operates as a 

preferred-provider network) and Standard (a traditional fee-for-service plan), which would rise over 

three years to $150 per family and then be indexed 

thereafter to the annual growth rate in the military’s 

health care costs; and

 The annual family deductible under TRICARE 

Standard or Extra would have increased over a threeyear period in three tiers as a function of the amount 

of retirement pay.

All of DoD’s Sustain the Benefit proposals were blocked 

by lawmakers. The 2007 NDAA prohibited, through 

September 30, 2007, any increases in certain health care 

charges for military beneficiaries along with any increases
42 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

in copayments under DoD’s retail pharmacy system.1

In particular, the NDAA contained the following 

provisions:

 Enrollment fees, deductibles, and copayments paid 

by retirees, their eligible family members, and their 

survivors for health care purchased from the private 

sector were frozen;

 The daily copayment amount was capped at $535 for 

inpatient care provided at private-sector facilities 

under TRICARE Standard;

 Premiums for the TRICARE Reserve Select program 

and the TRICARE Retired Reserve program were 

frozen; and

 Copayments for 30-day prescriptions filled at retail 

pharmacies were kept at $3 for generic drugs, $9 for 

brand-name drugs in the TRICARE formulary, and 

$22 for drugs not listed in the formulary. 

The 2008 NDAA extended those provisions through 

September 30, 2008, and the 2009 NDAA extended 

them again through September 30, 2009. 2

 DoD’s budget 

requests for 2010 and 2011 did not call for any increase 

in TRICARE fees, but the 2010 NDAA nonetheless 

extended, through September 30, 2010, the cap on the 

copayment for inpatient care under TRICARE Standard.3

 The 2011 NDAA extended, through September 

30, 2011, the freeze on enrollment fees, deductibles, and 

copayments made by retirees, their eligible family members, and their survivors, and it extended the pharmacy 

copayments that had been established four years before.4

The freeze on premiums for the TRICARE Reserve Select 

program has expired; DoD now sets the premium equal 

to 28 percent of the actuarial cost of coverage, and the 

department updates the premium annually, in keeping 

with the program’s costs realized during the preceding 

calendar year.5

 Current law requires beneficiaries enrolled 

in the TRICARE Retired Reserve program to pay 

100 percent of the actuarial cost of their coverage with 

no government subsidy.6

1. Section 704 of the 2007 NDAA (P.L. 109-364, 120 Stat. 2280–

2284).

2. Sections 701 and 702 of the 2008 NDAA, P.L. 110–181, 

122 Stat. 187 and 122, Stat. 188; and sections 701 and 702 of the 

2009 NDAA, P.L. 110–417, 122 Stat. 4498.

3. Section 709 of the 2010 NDAA, P.L. 111–84, 123 Stat. 2378.

4. Sections 701 and 705 of the 2011 NDAA, P.L. 111–383, 

124 Stat. 4244 and 124 Stat. 4246.

5. 10 U.S.C. §1076d(d)(3) (2006 & Supp.). For information, see 

“Your Profile: TRICARE Reserve Select” (July 25, 2012), 

http://go.usa.gov/mEk.

6. See “Your Profile: TRICARE Retired Reserve” (July 25, 2012), 

http://go.usa.gov/mE0.
APPENDIX

CBO

D

Were Military Personnel Promised 

Low-Cost Health Care in Retirement?

Much debate has concerned whether retired 

military personnel and their families have been promised 

(and are legally entitled to) low-cost or free health care for 

life. Military recruiters are said to have promised free 

lifetime health care in some cases as an inducement to 

people considering military service. The courts, however, 

have consistently ruled that any such informal promises 

do not constitute a contract for the military to provide 

lifetime health care and that only the Congress and the 

President could establish such a benefit. In October 

2000, lawmakers authorized the TRICARE for Life 

(TFL) program, which supplements Medicare 

for military retirees and their family members who are 

eligible for Medicare and largely eliminates their out-ofpocket medical expenses.1

 In 2011, the Department of 

Defense (DoD) made accrual payments of $11 billion for 

TFL, and the department spent an additional sum that 

the Congressional Budget Office estimates at between 

$14 billion and $18 billion to provide health care to military retirees and their families who were not yet eligible 

for Medicare.

Before TFL was created, retirees and their families would 

lose access to the civilian portion of their TRICARE benefits once they became eligible for Medicare, although 

they retained the right to obtain in-house care at military 

treatment facilities (MTFs) when space was available and 

to fill prescriptions without any copayment at MTF 

pharmacies. 

Specifically, the Dependents’ Medical Care Act of 1956 

states that retired military personnel “may, upon request, 

be given medical and dental care in any facility of any 

uniformed service, subject to the availability of space 

and facilities and the capabilities of the medical and 

dental staff.”2

 However, DoD has closed several military 

hospitals over the years—including, for example, three 

closed on the recommendation of the 1993 Defense Base 

Closure and Realignment Commission; thus the amount 

of space available has shrunk somewhat.3

 Some military 

retirees have argued that when such care is no longer 

available, the federal government is obliged to purchase 

care in the civilian sector on behalf of retirees and their 

families.4

In the years leading up to the introduction of TFL, lawmakers addressed military retirees’ claims that they had 

been promised lifetime health care but did not go so far 

as to authorize any new health care benefits for that 

group. The National Defense Authorization Act for 1998 

(Public Law 105-85), states the following:

(a) Findings.—Congress makes the following findings:

(1) Many retired military personnel believe that 

they were promised lifetime health care in 

exchange for 20 or more years of service.

1. Sections 712 and 713 of the Floyd D. Spence National Defense 

Authorization Act (NDAA) for Fiscal Year 2001 (Public Law 106-

398, 114 Stat. 1654A-176).

2. Ch. 374, 70 Stat. 250, 253; codified at 10 U.S.C. §1074(b)(1) 

(2006 & supp.), Medical and dental care for members and certain 

former members. 

3. The 1993 commission’s recommendations led to the closing of 

the naval hospitals in Charleston, South Carolina; Oakland, 

California; and Orlando, Florida. See Defense Base Closure 

and Realignment Commission: 1993 Report to the President, 

http://go.usa.gov/YEJ4.

4. For a comprehensive review of these issues through 2005, see 

David F. Burrelli, Military Health Care: The Issue of “Promised” 

Benefits, CRS Report for Congress 98-1006 (Congressional 

Research Service, updated January 19, 2006). 
44 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

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(2) Military retirees are the only Federal 

Government personnel who have been 

prevented from using their employerprovided health care at or after 65 years of 

age.

(3) Military health care has become increasingly 

difficult to obtain for military retirees as the 

Department of Defense reduces its health 

care infrastructure.

(4) Military retirees deserve to have a health care 

program that is at least comparable with that 

of retirees from civilian employment by the 

Federal Government.

(5) The availability of quality, lifetime health 

care is a critical recruiting incentive for the 

Armed Forces.

(6) Quality health care is a critical aspect of the 

quality of life of the men and women serving 

in the Armed Forces.

(b) SENSE OF THE CONGRESS.— It is the sense of 

Congress that—

(7) the United States has incurred a moral 

obligation to provide health care to members 

and former members of the Armed Forces 

who are entitled to retired or retainer pay (or 

its equivalent);

(8) it is, therefore, necessary to provide quality, 

affordable health care to such retirees; and

(9) Congress and the President should take steps 

to address the problems associated with the 

availability of health care for such retirees 

within two years after the date [November 

18, 1997] of the enactment of this Act. 5

Concurrent with Congressional interest, several parties 

filed lawsuits against the federal government in an 

attempt to enforce military retirees’ claims that they had 

been promised lifetime health care. In a case first filed in 

December 1996 (Schism and Reinlie v. United States), the 

plaintiffs alleged that the federal government had 

breached its implied-in-fact contracts by requiring the 

plaintiffs to purchase Medicare Part B (which covers doctors’ services, outpatient care, home health services, and 

certain other medical services) to replace the civilian portion of their military health benefit (the Civilian Health 

and Medical Program of the Uniformed Services—

CHAMPUS—the precursor to TRICARE that reimbursed a portion of the costs of health care that military 

retirees and their family members purchased from the 

private sector) once they became eligible for Medicare. 

That case was settled in November 2002 in the U.S. 

Court of Appeals for the Federal Circuit. On a vote of 

nine to four, the court ruled that although military 

recruiters may have enticed recruits with promises of free 

lifetime health care, those promises did not bind the military to provide such care; only the Congress could establish such a health care benefit, and it had not done so at 

the time those promises were made:

Of course, had Congress legislated that the 

military secretaries could contract with recruits for 

specific health care benefits, the situation would be 

different. However, because Congress (1) has 

enacted statutes for over 100 years that govern the 

level and availability of health care benefits for 

active and retired members of the armed services 

and their dependents; and (2) has never provided 

funds for contracts made by the secretary with 

recruits to grant health care, the inescapable 

conclusion is that Congress simply did not intend 

to delegate its authority over health care benefits 

for military members. Rather, it intended to 

occupy the entire field. In that context, one cannot 

reasonably infer that by empowering service 

secretaries to run their respective departments, 

Congress was silently authorizing them to grant 

health care benefits via oral promises to recruits by 

the service’s recruiters.6

Toward the end of the six-year period during which 

Schism and Reinlie v. United States was disputed, 

lawmakers authorized the TFL program. TFL began to 

offer benefits in 2002.

5. Section 752 of the 1998 NDAA, P.L. 105-85 (111 Stat. 1823).

6. Schism and Reinlie v. United States, 316 F.3d 1259, 1271 (Fed.Cir. 

(2002)).
NOVEMBER 2012 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET 45

CBO

List of Tables and Figures

Tables

1. Types of Military Compensation 6

2. DoD’s Funding Request for Military Compensation, 2013 7

3. Procedures for Updating Military Compensation 18

4. Average Annual Out-of-Pocket Costs for Military Retiree Families Under 

TRICARE Plans and for Civilian Counterparts with Employment-Based 

Insurance, 2011 29

5. DoD’s Funding Request for the Defense Health Program, 2013 32

Figures

S-1. Funding for Military Compensation 2

1. 2013 FYDP and Two Scenarios for the Defense Budget 15

2. Year-to-Year Continuation Rates Among Active-Duty Enlisted Personnel 17

3. Quality Trends Among Enlisted Recruits in the Active Military 

Who Did Not Have Prior Military Service 21

4. Illustration of Military Retirement Pay, by Year of Age, Under High-3 and REDUX 24

5. Annual Continuation Rates Among Active-Duty Enlisted Personnel, 2010 26

6. Projected Costs of the Military Health System 34
46 COSTS OF MILITARY PAY AND BENEFITS IN THE DEFENSE BUDGET NOVEMBER 2012

CBO

About This Document

This Congressional Budget Office (CBO) study was prepared at the request of the Chairman of 

the House Committee on the Budget. In keeping with CBO’s mandate to provide objective, impartial 

analysis, this study makes no recommendations. 

Matthew S. Goldberg of CBO’s National Security Division prepared the study under the general 

supervision of David Mosher. Elizabeth Bass, William Carrington, Heidi Golding, Sarah Jennings, 

Joseph Kile, T.J. McGrath, Carla Tighe Murray, Allison Percy, Dawn Sauter Regan, Chayim Rosito, 

and Matt Schmit of CBO provided helpful comments on the study. 

William Carr (an independent consultant) also reviewed the study. The assistance of an external 

reviewer implies no responsibility for the final product, which rests solely with CBO.

Kate Kelly edited the study, Maureen Costantino and Jeanine Reese prepared it for publication, and 

Maureen Costantino designed the cover. An electronic version is available on CBO’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf 

Director

November 2012