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The annual military pay raise has a key influence on manning the active-duty military services. In recent years, the rate of increase has been held below that of wages and salaries in the private sector. The military services' ability to retain and recruit enlisted personnel has so far remained strong, though continuing limits on pay would eventually create difficulties.

In its proposed budget for fiscal year 1986, the Administration recommended a military pay increase that would have more than kept pace with expected increases in private sector wages; lower increases were, however, debated. The Subcommittee on Military Personnel of the House Armed Services Committee asked the Congressional Budget Office (CBO) to look at alternatives to the Administration's budget proposal, including a freeze on military pay. This report compares the alternatives in terms of their effects on enlisted retention and recruitment over the next five years. In keeping with CBO's mandate to provide objective analysis, the report makes no recommendations.

Joel Slackman of CBO's National Security Division prepared the report under the general supervision of Robert Hale and Neil Singer. The author thanks Jonathan Woodbury and Robert Mechanic, also of CBO, for their crucial technical support. Frank Pierce edited the manuscript; G. William Darr helped prepare it for publication.
 

May 1985
 
 

Under current law, active-duty military personnel are to receive an annual raise in October. Each percentage point increase in their pay adds more than $600 million to budget authority. With the prospect of large, persistent deficits throughout the decade, the annual pay raise stands out as a target for saving.

The Administration has proposed raising pay 3 percent in July 1985 instead of October 1985, with no further raises until October 1986. The House Armed Services Committee has proposed a 3 percent raise, though not until January 1986. This analysis documents the effects of the 3 percent raise versus both a pay "freeze"--that is, no raise at all until October 1986--and selective pay increases. The pay freeze was discussed early in this year's defense budget debate.

CBO's analysis finds, that a one-year freeze in pay would hurt recruiting and retention, especially in the Army and the Navy. With a freeze but no other real changes in compensation, the services would not retain or recruit as many personnel as they would if pay rose 3 percent. However, the services' career forces and recruit quality should stay well above the low levels of 1980 when manning problems were of great concern, especially if the Army continues to relax restrictive personnel policies. And erosion in the career force would be negligible if increased reenlistment bonuses accompanied the freeze.
 

SAVINGS FROM ALTERNATIVE APPROACHES

Under the Administration's proposal for a 3 percent raise in July, military pay would more than keep pace with the 3.1 percent increase in private civilian wages that CBO expects to occur during 1985. Less generous increases could save substantial sums. Deferring the 3 percent raise until January 1986 would save $450 million in defense budget authority and outlays in 1986. Eliminating the raise altogether, thereby freezing military pay for a year, would save $1.8 billion in 1986 and $9.9 billion over the next five years.
 

ABILITY TO RETAIN EXPERIENCED PERSONNEL

Savings in pay would come at some loss in manpower. In varying degree, alternative pay raises would affect the military services' ability to retain career enlisted personnel (defined as those with five or more years of active-duty service).

Assuming a 3 Percent Pay Raise

Raising pay, either in July or January, by 3 percent would support further growth in the career forces. Between 1985 and 1990, the services would altogether add more than 29,000 people. (Choosing July or January would make only a modest difference.) In the Air Force and Marine Corps, numbers of career enlisted personnel could reach the highest levels since the All Volunteer Force (AVF) began. Navy career personnel would increase by several thousand; Army numbers would stay fairly level.

How would the projected career forces compare with the levels of earlier years? Unfortunately, no clear metric for judging such a comparison stands out, since the services do not set formal goals; their personnel programs may reflect feasibility as much as optimality. CBO has chosen 1980 as a benchmark. That year was one of severe manning problems, and hence it may be regarded as a lower bound for purposes of comparison.

By the measure of 1980, the career forces would remain at satisfactory levels under the Administration's proposal. Not only would numbers of career enlisted personnel exceed 1980 levels; their proportion to all personnel would also be higher, despite the substantial growth taking place in the total enlisted force's size. The proportion of career personnel would actually increase over present levels in the Air Force and Marine Corps. It would stay steady in the Army. In the Navy the proportion would decline, reflecting a large planned growth in the total size of its enlisted force, but in numbers career personnel would still be well above the levels of 1980.

Assuming a Pay Freeze

Freezing pay for one year would not stem growth through 1990 in numbers of career personnel in the Air Force or Marine Corps. Past momentum would propel them upward. The other two.services would not fare as well, however. Between 1985 and 1990, the Navy's career force could lose 3,500 people and the Army's, 14,200; but their career forces would still remain above 1980 levels, in both numbers and in proportion to the total forces (see Summary Table).

Changes in reenlistment policy could brighten the Army's prospects considerably, adding several thousand soldiers to the career force. Throughout 1983 and 1984, the Army inhibited reenlistments by soldiers who were slow in winning promotion, a disproportionate number of whom scored below average on the Armed Forces Qualification Test (AFQT) as recruits. In 1985, the Army began relaxing this policy. If carried further, this relaxation might actually add 4,400 soldiers to the Army's career force over the next five years. The reason is that additional reenlistments among lower scoring soldiers would more than offset losses of higher scoring ones.

Freezing pay could thus yield large budgetary savings without necessarily diminishing the size of the career force. The effects this might have on the quality of the career force are uncertain, since the evidence linking AFQT scores to later performance is not definitive.
 

Raising Pay Selectively

One way to hold down costs while minimizing effects on retention would be through a selective pay increase in place of the Administration's across-the-board approach. If the annual pay raise was eliminated in 1986, DoD could, for example, design a package of reenlistment bonuses having about the same effect on career reenlistments as a 3 percent raise in July. Savings would still be considerable--at least $7.1 billion through 1990 compared to $9.9 billion under the one-year pay freeze. In this example, pay raises would go only to enlisted personnel with 10 or fewer years of service who were eligible for reenlistment. Pay increases would not be spread over groups in little need of improved retention: most officers, and the more junior and senior enlisted personnel. Of course, the effects of such selective pay increases would not be identical to those of an across-the-board raise.
 

ABILITY TO RECRUIT

This year's decision on the pay raise has less importance for recruitment than for retention. Whether pay increases 3 percent or not at all, the services' ability to recruit should remain about the same. A one-year freeze would have only modest effect on youths' willingness to enlist. By lowering retention, however, a freeze would force up annual requirements for recruits.

At issue is the quality of those recruits, because the services can usually attract enough people to meet bare numerical needs. Chief measures of recruits' quality include the proportion holding high school diplomas and their scores on the military's entrance examination. As with retention, there is no clear metric for judging quality. The Congress has set limits on education and test scores: in the Army at least 65 percent of male recruits must have high school diplomas; and in each service, no more than 20 percent of recruits can have scored markedly below average. The Army itself has announced much higher goals, very high by historical standards, but they are still under review by the Department of Defense.

Regardless of the pay raise, the Air Force and Marine Corps should be able to continue recruiting high percentages of high school diploma graduates (HSDGs). The proportion scoring markedly below average on the entrance examination would also remain low.

For the Army and Navy, however, the outlook is difficult with or without a pay raise. An improving economy and shrinking youth population will tend to drive recruiting down no matter what happens to the military pay raise. The Navy could return to quality levels typical of the 1970s, when its HSDG percentages stood in the low 70s, though its proportion of low-scoring recruits would be smaller than in the 1970s.

Army recruiting could also deteriorate, especially as measured against the success of the last three years when HSDG percentages averaged above 85 percent. A one-year pay freeze would cause the Army's HSDG percentage to drop into the low 70s, perhaps even lower by decade's end. While this would be better than the 1980 level of about 50 percent, it would not be nearly high enough to meet the Army's new goals for quality, which call for 90 percent of recruits to be high school graduates.

Approaches other than across-the-board pay raises could help to offset these problems. To improve recruiting, the Army, and possibly the Navy, could spend more on bonuses or advertising; such added spending would be modest relative to the costs of a pay raise. Or the Army could modify its personnel policies. For example, further relaxing reenlistment policies would cut losses of experienced personnel, thus easing the demand for new recruits. Raising the allowable percentage of recruits in Category IV (the lowest acceptable category on the military entrance examination) could also boost HSDG percentages. Category IV recruits do not appear to perform as well as recruits who score higher, but the percentages of recruits scoring in that category are now very low compared to 1980 or even to the 1970s; this may give the Army room for change.
 

EFFECTS OF OTHER PAY CHANGES

Freezing pay for one year probably would not cause a return to the major enlisted manpower problems of 1980, and many adverse effects could be offset by other personnel policy changes. This conclusion rests on the assumption--which some may find optimistic--that military pay would keep pace with increases in private civilian wages after 1986. Restricting growth in military pay beyond 1986 would increase the risk of reverting to the unsatisfactory conditions of 1980. The outlook could also worsen if the Congress reduced other pay programs, such as bonuses or military retirement. For example, a major retirement reform--as the House Armed Services Committee has proposed in principle--would have important effects that are beyond the scope of this analysis.

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