More Cash Compensation Recommended

February 19, 2004

To attract and retain the military personnel that it needs, the Defense Department should offer a compensation package more heavily weighted toward cash, the Congressional Budget Office (CBO) recommends. This would make compensation competitive with the civilian sector and adequately reward service members for the rigors of military life, the CBO said in a recent issue brief.

It estimated that in 2002 (the most recent year for which comprehensive data are available), the average active-duty service member received a compensation package worth about $99,000. Non-cash compensation now represents almost 60 percent of the military pay package. Cash compensation-basic pay, food and housing allowances, special pay and bonuses, and the tax advantage that service members receive because some allowances are not subject to federal income tax-makes up the other 40 percent.

About 40 percent of non-cash compensation consists of subsidized goods and services that can be used immediately-such as medical care, groceries, housing, and child care. The remaining 60 percent of non-cash compensation is the accrued cost of retirement pensions and other deferred benefits that service members receive after they leave active duty-including health care for retirees and veterans' benefits.

The military's traditional use of non-cash benefits reflects, in part, a belief that such benefits are cost-effective because they support unit cohesion and reduce the costs that service members incur in searching for new schools, stores, and housing as they move among installations.

However, today's military increasingly deploys service members overseas without their families for a shorter period of time rather than rotating members and families to and from overseas stations for extended tours. 

Some recent policy initiatives-including allowing some disabled retirees to receive both full retirement pay and tax free disability compensation-have shifted the overall mix of compensation further toward non-cash and deferred benefits.

But many analysts now question the extent of the military's reliance on non-cash benefits and believe that a greater emphasis on cash would be more efficient. The value of cash is more easily recognized by potential recruits, by current military members deciding whether to reenlist, and senior decision makers, they said.

Options examined by the CBO include offering medical "cafeteria plans" to give active-duty service members a choice between cash compensation and a medical insurance plan with few co-payments and deductibles.