WASHINGTON—As the politicians and the public begin discussions for yet another fiscal cliff crisis before the new deadline of March 1, they could consider—in addition to cutting entitlement—another form of discretionary spending.
The Department of Defense (DOD) budget was described as “bloated” by the man nominated to be its next secretary, former Sen. Chuck Hagel (R-Neb.). Locating the alleged waste, however, is a challenge.
“How can we cut without harming national security in this juncture in the nation’s history?” Michael O‘Hanlon asked rhetorically at a discussion, Warriors Against Waste, held at the Brookings Institution on Jan. 24. O’Hanlon is a senior fellow and director in the foreign policy program at Brookings, where he specializes in U.S. defense strategy.
In preparation for this forum, O‘Hanlon wrote a memorandum to President Barack Obama that he shared with the audience. The memorandum set forth two basic approaches to budget cuts—“modest savings” and “big cuts.” If the country goes the latter route and decides to make substantial cuts like those proposed by the Simpson-Bowles commission, it would probably be necessary to reduce the size of the force and make major changes in military compensation, according to O’Hanlon.
The active-duty Army could be downsized from 500,000 soldiers, as it is now, to 400,000 soldiers, for example. That number would still be sufficient to engage in a major mission similar to the one in Afghanistan, but it would be difficult to fight two wars concurrently, which has been the basic American military strategy for decades.
“Military compensation, now $25,000 greater per person than at the start of the Bush administration, might be gradually returned toward 2001 levels,” O'Hanlon wrote, adding that this reduction, however, runs a major risk for a nation that relies on an all-volunteer military.
O'Hanlon has little appetite for such “big cuts.” Although it would save around $300 billion, it holds risks that are not worth the benefits. However, there are efficiencies that can be gained that could achieve more modest savings of $100 billion–$200 billion over one decade, he said. The forum discussed several ways to save this money through various reforms without fundamentally changing the overall strategy.
Advice From a Budgetary Expert
Alice Rivlin was asked to frame the discussion of defense savings in a wider budgetary context, and Rivlin is well qualified to discuss budgetary concerns. She was vice chair of the Federal Reserve Board, director of the White House Office of Management and Budget in the first Clinton administration, and the founding director of the Congressional Budget Office (CBO). She served as co-chair of the Domenici–Rivlin Debt Reduction Task Force, and in February 2010, Rivlin was named by President Obama to the National Commission on Fiscal Responsibility and Reform.
Rivlin explained that the country’s spending commitments are rising faster than its future revenues. The situation is not sustainable. The debt, at 73 percent of Gross Domestic Product, could result in “much slower economic growth” and a delayed recession.
“Defense spending, as you look ahead, is not driving the debt,” added Rivlin, yet the military is no less affected by changes occurring in the larger population, with the aging of the population and its rising health care costs. Tricare For Life as well as pensions are expensive parts of the defense budget and need to be reformed, “not just to save money, but to improve fairness and reduce wasteful health care expenditures,” she said.
Rivlin asked, “Besides health care and pension reform, are there ways to save money that will not impair effectiveness?”
Health Care, Pensions, and Compensation
There are some potential savings in the logistics and maintenance side of the military that totals to $80 billion annually, which “could be quite substantial,” according to Dr. Nick Avdellas, program manager at LMI Government Consulting; his team advises the deputy secretary of defense for maintenance.
However, this aspect has been looked at carefully, and some areas have been made more efficient already, according to Avdellas. He said that it is an extremely complex subject that will “take a lot of time, leadership, metrics, and fortitude to get [more efficiencies].” Potential savings would be $3 billion–$5 billion.
Another place to save is by closing bases, here and overseas. But William Moore, Ph.D., civil engineer and executive vice president of infrastructure management at LMI, said that it will take time and initial cost for base closure, and that it will be hard to see any money in the first three to five years.
O'Hanlon suggested that commissaries and exchanges in the states might be closed.
The more low-hanging fruit for cost savings lies in compensation and health care. It does not make a lot of sense that for decades, military personnel have been able to retire around age 42 with half their basic pay and then continue to work in the civilian world longer than they did in the military, according to Jack Mayer, board chairman of the Homeland Security & Defense Business Council, and a Booz Allen Hamilton executive vice president, and former deputy assistant director at the CBO.
The retirement system has been adjusted three times in the last 40 years, according to Lt. Col. John Barnett, U.S. Marine Corps federal executive fellow, speaking as an individual and not officially. Barnett said that the military reduced the basic pay to 40 percent, but the program did not last long and was repealed. There has been discussion of going to a government-type Thrift Savings Plan, or a 401 equivalent for those not serving the full 20 years, but Barnett, who has nearly six years’ experience in recruiting, warned that while savings would occur, weakening incentives may impact retaining a high-quality force.
From 1989 to 2009, basic pay has increased 100 percent for nearly every rank, said Barnett, adding that military pay is a big chunk of the budget—about 50 percent. The pay increases were probably justified in the 1980s because military compared to civilian compensation was underpaid, but now an adjustment might be in order.
“Tricare increases at a much faster rate than the cost of health care in the country as a whole, [and] is killing the military [budget],” said Mayer.
O‘Hanlon cited CBO figures that the health care annual costs are $50 billion, and about 90 percent or more is paid by the government. If health care premiums were gradually increased to align more closely with what prevails in the civilian sector, perhaps $30 billion–$50 billion could be saved in the next decade, according to O’Hanlon. But he admitted that it would be difficult politically to get this through Congress.
O'Hanlon added that comparable savings could be accrued with pension reform, but Congress did not go along last year with the limited changes proposed by the administration.
Savings From Mission Alignment
One relatively large source of savings is by “mission alignment,” according to Moore.
“The alignment between mission and with the products and services that the organization delivers to make good on that mission is often not something good,” he said, adding that one needs to look hard at the mission and what one is doing to see if there are things that are not appropriate or do not align with the mission, and then eliminate these. Moore’s work at LMI found 5–20 percent savings, which could potentially save $1.5 billion–$4 billion annually.
On a more theoretical level, Mayer suggested something similar on defining missions. Mayer said that we use the military for a lot of different things that it was not envisioned to do. Mayer criticized Homeland Security and the DOD for overlapping in their missions. For example, the National Guard is assigned overseas when its mission should be protecting our shores, he said.
“Now is the time to be able to say what it is that we want our military to do in the future. Define what those missions should be very carefully, and then fund them forth to be able to do those missions,” Mayer said.
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