Military Personnel: DOD Needs to Improve the Transparency and	 
Reassess the Reasonableness, Appropriateness, Affordability, and 
Sustainability of Its Military Compensation System (19-JUL-05,	 
GAO-05-798).							 
                                                                 
Over the years, the Department of Defense's (DOD) military	 
compensation system has become an increasingly complex and	 
piecemeal accretion of pays, allowances, benefits, and special	 
tax preferences. DOD leaders have expressed concern that rising  
compensation costs may not be sustainable in the future and could
crowd out other important investments needed to recapitalize	 
equipment and infrastructure. Given the looming fiscal challenges
facing the nation in the 21st century, GAO believes it is time	 
for a baseline review of all federal programs to ensure that they
are efficiently meeting their objectives. Under the Comptroller  
General's authority, GAO (1) assessed whether DOD's approach to  
compensation provides adequate transparency over costs; (2)	 
identified recent trends in active duty compensation, and how	 
costs have been allocated to cash and benefits; and (3) reviewed 
how active duty servicemembers perceive their compensation and	 
whether DOD has effectively explained the value of the military  
compensation package to its members.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-798 					        
    ACCNO:   A30317						        
  TITLE:     Military Personnel: DOD Needs to Improve the Transparency
and Reassess the Reasonableness, Appropriateness, Affordability, 
and Sustainability of Its Military Compensation System		 
     DATE:   07/19/2005 
  SUBJECT:   Data collection					 
	     Financial analysis 				 
	     Military compensation				 
	     Military personnel 				 
	     Military policies					 
	     Payroll systems					 
	     Policy evaluation					 
	     Program management 				 
	     Surveys						 
	     Cost analysis					 
	     Systems analysis					 
	     Strategic planning 				 
	     Transparency					 

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GAO-05-798

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

July 2005

MILITARY PERSONNEL

     DOD Needs to Improve the Transparency and Reassess the Reasonableness,
Appropriateness, Affordability, and Sustainability of Its Military Compensation
                                     System

                                       a

GAO-05-798

[IMG]

July 2005

MILITARY PERSONNEL

DOD Needs to Improve the Transparency and Reassess the Reasonableness,
Appropriateness, Affordability, and Sustainability of Its Military Compensation
System

  What GAO Found

DOD's historical piecemeal approach to military compensation has resulted
in a lack of transparency that creates an inability to (1) identify the
total cost of military compensation to the U.S. government and (2) assess
the allocation of total compensation investments to cash and benefits. No
single source exists to show the total cost of military compensation, and
tallying the full cost requires synthesizing about a dozen information
sources from four federal departments and the Office of Management and
Budget. Without adequate transparency, decision makers do not have a true
picture of what it costs to compensate servicemembers. They also lack
sufficient information to identify long-term trends, determine how best to
allocate available resources to ensure the optimum return on compensation
investments, and better assess the efficiency and effectiveness of DOD's
current compensation system in meeting recruiting and retention goals. To
address this and other major business transformation challenges in a more
strategic and integrated fashion, GAO recently recommended the creation of
a chief management official at DOD.

Transparency over military compensation is critical because costs to
provide compensation are substantial and rising, with over half of the
costs allocated to noncash and deferred benefits. In fiscal year 2004, it
cost the federal government about $112,000, on average, to provide annual
compensation to active duty enlisted and officer personnel. Adjusted for
inflation, the total cost of providing active duty compensation increased
about 29 percent from fiscal year 2000 to fiscal year 2004, from about
$123 to $158 billion. During this time, health care was one of the major
cost drivers, increasing 69 percent to about $23 billion in fiscal year
2004. In addition, military compensation is weighted more toward benefits
compared with other government and private sector civilian compensation
systems. Furthermore, less than one in five service members will serve 20
years of active duty service to become eligible for retirement benefits.
Increasing compensation costs make the need to address the appropriateness
and reasonableness of the compensation mix and the long-term affordability
and sustainability of the system more urgent.

DOD survey results and analysis of GAO focus groups and survey data have
shown that servicemembers are dissatisfied and harbor misperceptions about
their pay and benefits in part because DOD does not effectively educate
them about the competitiveness of their total compensation packages. About
80 percent of the 400 servicemembers that GAO surveyed believed they would
earn more as civilians; in contrast, a 2002 study showed that
servicemembers generally earn more cash compensation alone than 70 percent
of like-educated civilians. Servicemembers also expressed confusion over
aspects of their compensation, like retirement, and many complained that
benefits were eroding despite recent efforts by Congress and DOD to
enhance pay and benefits. By not systematically educating servicemembers
about the value of their total compensation, DOD is essentially allowing a
culture of dissatisfaction and misunderstanding to perpetuate.

United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
DOD's Compensation System Lacks Transparency to Identify Total

Costs and How Compensation Is Allocated Heavy Reliance on Benefits May Not
Be Appropriate for Meeting Key Human Capital Goals or Not Sustainable in
the Long Term

DOD's Lack of an Effective Communicationand Education Effort on
Compensation Has Allowed Servicemembers' Misperceptions and Concerns about
Their Compensation to Perpetuate

Conclusions
Recommendations for Executive Action
Matter for Congressional Consideration
Agency Comments and Our Evaluation

1 4 7

8

14

27 35 37 37 37

Appendixes

       Appendix I: Scope and Methodology 42 Appendix II: Sample of a Personal
        Statement of Military Compensation 49 Appendix III: Comments from the
                  Department of Defense 53 Appendix IV: GAO Contact and Staff
                                                           Acknowledgments 56

Related GAO Products

Tables    Table 1: Total Costs to Provide Active Duty Servicemembers    
                           Compensation (Source and Types)                 10 
           Table 2: Summary of Changes in Compensation Costs, Fiscal Years 
                                    2000 and 2004                          19 
                        Table 3: Composition of Focus Groups               46 
Figures       Figure 1: Total Compensation Cost and Per Capita Cost for    
                                                    Fiscal Years 2000-2004 16
               Figure 2: The Allocation of Cash, Noncash, and Deferred     
                       Compensation Costs per Active Duty Servicemember in 
                                  Fiscal Year 2004                         22 
              Figure 3: 2003 Mix Salary/Wages and Benefits in Civilian     
                                    Compensation                           24 

Contents

Figure 4: Percent of Enlisted Personnel and Officers Who Serve a 20-Year
Career 26 Figure 5: Reasons for Servicemembers' Dissatisfaction with Pay
and Benefits 31

Abbreviations

DHP Defense Health Program
DOD Department of Defense
MEPS Medical Expenditures Panel Survey
VA Department of Veterans Affairs

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

July 19, 2005

Congressional Committees

The military compensation system has had the same basic structure since
the end of World War II, but over time, it has become a complex and
piecemeal culmination and accretion of pay, benefits, and special tax
preferences-each designed to meet a specific need in managing an evolving
force. Today, the total military compensation package includes dozens of
pays and allowances; several noncash benefits to take care of troops who,
increasingly, are married with children; certain preferences; as well as
lifetime retirement pay and health care for retirees and their families.
Valuing military service is complicated. Serving in the military offers
personal and professional rewards but also requires many
sacrifices-frequent moves and jobs that are arduous and sometimes
dangerous. Moreover, military culture is paternalistic, and servicemembers
expect the United States to take care of them and their families as reward
for their service. Since the late 1990s, the Department of Defense (DOD)
and Congress have sought to improve military pay to make it more
competitive. Congress has improved benefits by repealing the unpopular
REDUX retirement system in 1999 and expanding health coverage to cover
retirees and their families for life in 2002, among other enhancements.1
Even with these efforts, however, reports of dissatisfaction with some
pays and benefits among military members still abound, and public
perceptions linger that enlisted military members and their families are
living in poverty.

1 The Military Retirement Reform Act of 1986, also known as REDUX, had
changed the retirement system by (1) reducing the amount received at 20
years of service, (2) raising the growth in retired pay for each year
served after 20 years of service, and (3) reducing the real value of
retired pay in an inflationary environment.

In recent years, Congress has taken steps to fund enhanced compensation
and benefit programs for active duty and reserve personnel at a time when
many military personnel are spending months or years away from home, often
in harm's way, as the nation is heavily engaged in the war on terrorism.
Moreover, as of 2005 DOD's budget had grown to nearly half a trillion
dollars, including supplemental funding to support activities related to
fighting terrorism. In our recent report on the challenges facing the
United States in the 21st century, we expressed concerns about whether the
current trends are both affordable and sustainable.2 Many federal
programs-such as military compensation-were designed decades ago to
address earlier challenges related to labor markets, security conditions,
organizational structures, and compensation strategies of prior eras. Some
DOD leaders have expressed similar concerns, specifically that the
increasingly expensive compensation system could crowd out other important
investments needed to recapitalize aging defense-related equipment and
infrastructure. Moreover, DOD leaders are particularly concerned about the
growth in compensation entitlements-such as health care and concurrent
receipts for disability and retirement-that do not have a significant
impact on recruiting and retention. In 2005, the compensation debate was
reopened when mounting concerns within the department about the growth in
compensation cost-and the limited management flexibility afforded by the
current system-led the Secretary of Defense to form a committee to
comprehensively assess the approach the department uses to compensate its
personnel.

Given the nation's increasing fiscal imbalance, we believe it is time for
a baseline review of all major federal programs and polices, including
military compensation, to ensure that they are efficiently and effectively
meeting their objectives and well adapted to 21st century realities. We
recognize that this will not be a simple or easy process and careful
consideration must be given to any compensation changes because the stakes
are high. We are convinced, however, that this reexamination offers
compelling opportunities to both redress our current and projected fiscal
imbalance while better positioning government to meet the new challenges
and changing expectations of the 21st century.

In light of the above and under the statutory authority of the Comptroller
General, we (1) assessed whether DOD's current approach to military

2 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

compensation provides adequate transparency over total costs to the
federal government; (2) identified the recent trends in active duty
military compensation costs, and how compensation has been allocated to
cash and benefits; and (3) reviewed how active duty servicemembers
perceive their compensation and whether DOD has effectively explained the
value of the military compensation package to its members.

In conducting this review, we limited our scope to the compensation system
for active duty military personnel. Numerous methods were used to gather
and assess information for this work. We reviewed congressional
justification budget books for DOD as well as the Department of Veterans
Affairs (VA). We calculated the federal tax expenditure and accrual cost
of some programs, such as those run by the VA. We conducted 40 focus
groups with over 400 servicemembers across all four services and enlisted
and officer pay grades at eight military installations in the continental
United States. While the information from the focus groups is not
generalizable to the entire DOD population of active duty servicemembers,
it provides valuable context as to servicemembers' perceptions about their
compensation and augments DOD survey findings. We reviewed DOD's Status of
Forces survey data on satisfaction with compensation. The 2002 survey
administered to over 30,000 servicemembers had a response rate of 32
percent. DOD has conducted and reported on research to assess the impact
of nonresponse rate on overall estimates. It found that, among other
characteristics, junior enlisted personnel (in pay grades E1 to E4),
servicemembers who do not have a college degree, and members in services
other than the Air Force were more likely to be nonrespondents. We have no
reason to believe that potential nonresponse bias not otherwise accounted
for by DOD's research is substantial for the variables we studied in this
report. Therefore, we concluded the data to be sufficiently reliable for
the purposes of this report. See appendix I for more detailed information
on our scope and methodology. We conducted our review from August 2004
through May 2005 in accordance with generally accepted government auditing
standards.

Results in Brief	The piecemeal approach to military compensation has
resulted in a lack of transparency that creates two interrelated problems
for decision makers. Specifically, this approach creates an inability to
(1) identify the government's total costs to provide compensation to
active duty servicemembers and (2) assess how compensation investments are
allocated to cash, benefits, and deferred compensation. No single source
exists to show the total cost of military compensation, and tallying the
full cost required us to synthesize information from several different
portions of the federal budget. In a typical civilian firm, managers know
the costs of compensation among other costs, such as capital and
technology, in order to make decisions on the most efficient and effective
use of resources. Furthermore, federal accounting standards are aimed at
providing relevant and reliable cost information to assist Congress and
executives in making decisions about allocating federal resources.
Therefore, we believe it is good business practice for decision makers to
establish a foundation that provides them transparency over total
compensation costs including the long-term cost and implications of
current decisions. Without transparency, DOD and Congress do not have
adequate visibility over a basic foundation of what it is truly costing
the government to compensate servicemembers. Furthermore, they lack
sufficient information to (1) identify long-term trends in costs, (2)
determine how to best allocate resources to ensure the optimum return on
compensation investments, and (3) assess the efficiency of the current
compensation system on DOD's ability to meet recruiting and retention
goals. This lack of transparency over the total military compensation
costs is another indication that DOD needs a Chief Management Official
(CMO)-a recommendation we recently proposed to address a range of business
transformation challenges in a more strategic and integrated fashion.3

3 GAO, Key Elements Needed to Successfully Transform DOD Business
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005).

The federal government's total costs to provide military compensation are
substantial and rising, and 51 percent of the total compensation costs are
allocated to noncash and deferred benefits. In fiscal year 2004, the
federal government's total annual cost to provide military compensation
was about, on average, $112,000 per active duty servicemember (including
enlisted and officer personnel) when compensation costs for cash, noncash,
and deferred benefits are considered.4 Adjusted for inflation, total cost
of compensation increased from about $123 billion in fiscal year 2000 to
$158 billion in fiscal year 2004-about 29 percent. The main drivers in the
growth of total compensation costs from fiscal years 2000 through 2004
included: (1) basic pay (from $38.4 to $47.4 billion, about 23 percent);
(2) allowances for private housing (from $7.3 to $12 billion, more than 66
percent); and (3) health care benefits for current servicemembers,
retirees, and dependents (from $13.8 to $23.3 billion, about 69 percent).
Continued significant future increases in these costs, particularly health
care, raise questions about the long-term affordability and sustainability
of the system. For example, the Congressional Budget Office estimated that
DOD could spend as much as $52 billion annually on health care by 2020.5
Furthermore, the mix of compensation for servicemembers is weighted toward
noncash and deferred compensation, with these types of compensation
accounting for slightly over half of annual compensation costs in fiscal
year 2004. This mix in compensation stands in contrast to private sector
and federal civilian workforces, which typically receive onethird or less
of their compensation in the form of benefits and deferred compensation.
Furthermore, deferred compensation, like retirement pay, represents about
a third of total military compensation costs, but less than one in five
servicemembers will serve a full career and become eligible for active
duty retirement pay and benefits. Given the rapid rise of compensation
costs and the significant emphasis on noncash and deferred compensation,
it is unlikely that DOD's current approach to compensation is reasonable,
appropriate, affordable, and sustainable over the long term.

4 Our average costs of compensation includes cash (e.g., basic pay,
housing allowance, and special tax preference), benefits (e.g., health
care, education assistance), and deferred benefits (e.g., contributions to
retirement pay) divided by the end strength. According to DOD, over
100,000 mobilized reservists have been paid out of active duty cash
compensation since fiscal year 2002. If these personnel were included, the
average cost would be about $5,000 lower in fiscal year 2004.

5 Congressional Budget Office, Growth in Medical Spending by the
Department of Defense (Washington, D.C.: September 2003).

According to recent DOD survey results, which were supported by our focus
group analysis, some servicemembers are dissatisfied, and in some cases,
harbor misperceptions about their pay and benefits in part because DOD
does not effectively inform them about the competitiveness of their total
compensation packages. It is industry best practice for employers to
educate employees about the value of their compensation in terms of the
pay and benefits they receive. We believe it is also important to inform
employees on how their total compensation compares with the employment
market. DOD's efforts to communicate pay and benefit information to
servicemembers-mainly through Internet Web sites and distribution of
annual earnings statements-have not positively influenced servicemembers'
perceptions. Repeated DOD-wide surveys have consistently found that a high
proportion-almost half of servicemembers in some cases-are dissatisfied
with aspects of their compensation from basic pay to allowances for
subsistence and housing. Furthermore, DOD officials acknowledge that
servicemembers harbor misperceptions about their compensation. Our focus
group findings, though not generalizable, corroborated these perceptions
and revealed that servicemembers often misunderstood their compensation
and harbored concerns about it. When we compiled the data from the survey
administered during our focus group sessions, we found that about 9 in 10
participants underestimated the cost of their compensation packages, and
80 percent believed they would make more in a civilian job. However, a
recent DOD-sponsored study showed that, on average, military cash
compensation alone-not including benefits-was at the 70th percentile of
like-educated civilians.6 Servicemembers participating in our focus groups
also expressed confusion over certain aspects of their compensation, such
as how their retirement system worked. We heard frequent complaints from
senior enlisted servicemembers and officers that benefits were eroding,
despite recent efforts to enhance benefits. This perception, as mentioned
before, is in direct contrast to the reality that costs to compensate
servicemembers have risen dramatically in recent years and benefits costs
are projected to rise even more dramatically in the future. By not
systematically informing servicemembers about the value of their total
compensation, DOD is essentially allowing a culture of dissatisfaction and
misunderstanding to perpetuate even though the department and Congress
have made significant efforts in recent years to increase military
compensation.

6 Office of the Under Secretary of Defense for Personnel and Readiness,
The Report from the Ninth Quadrennial Review of Military Compensation
(Washington, D.C.: May 2002).

We are making recommendations that should improve the transparency,
reasonableness, and appropriateness of the military compensation system.
In commenting on a draft of this report, DOD generally concurred with our
recommendations.

Background	DOD is one of the nation's largest employers-employing
approximately 1.4 million active duty military personnel and 1.2 million
reservists. In addition, 2 million retirees receive pay and benefits from
the department. DOD is also the largest employer and trainer of young
adults in the United States, recruiting about 200,000 individuals into
active duty in 2004-the majority of them recent high school graduates.
Although DOD competes with academia and other employers for these
qualified people, the military's distinctive culture and job experience
are unique from any other government or private sector employer. To
maintain national security, DOD must meet its human capital needs by
recruiting, retaining, and motivating sufficient numbers of qualified
people.

The Office of the Secretary of Defense, Personnel and Readiness is
principally responsible for establishing active duty compensation policy.
However, reservists fall under the active duty compensation policy if they
have been mobilized for active duty. The department also sponsors regular
studies on military compensation called the Quadrennial Review of Military
Compensation-most recently completed in 2002-that typically focus on
specific issues like flexibility in compensation. In 2005, the Secretary
of Defense formed a committee to study military pay in order to seek ways
to maintain a cost-effective, ready force. Although the structure of the
military compensation system has been largely unchanged since the end of
World War II, with the advent of the all-volunteer force in 1973, the
system has been enhanced by adding various pays, benefits, and tax
preferences over time. Currently, the system is a complex mix of pays,
benefits, and tax preferences-about a third of which are deferred until
after the completion of active duty service.

In the 1970s, DOD and Congress adopted the concept of "regular military
compensation"-which is defined as the sum of basic pay, allowances for
housing and subsistence, and the federal tax advantage7-to describe the
foundation of servicemembers' cash compensation which can be used to
compare military and civilian pay.8 Basic pay-which is predicated on rank
and tenure of service-is the largest component of regular military
compensation. In addition to regular military compensation, there are over
60 authorized special and incentive pays-generally offered as incentives
to undertake or continue service in a particular specialty or type of duty
assignment-as well as the combat zone tax exclusion, which generally makes
income earned while serving in a combat zone nontaxable.9 Furthermore, DOD
offers a wide range of benefits, many of which are directed at members
with family obligations. DOD believes benefits are central to morale and
readiness as well as important in providing members with a quality of life
to help cope with the sacrifices they make.

DOD's Compensation System Lacks Transparency to Identify Total Costs and
How Compensation Is Allocated

Decision makers in Congress and at DOD do not have adequate transparency
over total costs for providing military compensation to active duty
servicemembers in terms of how compensation is allocated in the near term,
if compensation investments are cost effective in meeting recruiting and
retention goals, how much changes to compensation will cost in the long
term, and whether compensation costs are affordable and sustainable in the
future. Lack of transparency over costs is in part due to the sheer number
of pays and benefits that make up the military compensation system and to
the lack of a single source to show total cost of compensation. Moreover,
the lack of principles to guide military compensation policy is a
long-standing problem for DOD.

7 The federal tax advantage is the additional income servicemembers would
have to earn if their allowances for housing and subsistence were subject
to federal income tax.

8 Pub. L. No. 93-419 (Sept. 1974).

9 The combat zone tax exclusion allows servicemembers to exclude income
earned- including basic pay, bonuses, special pays, and allowances-for
each month served in a designated combat zone. Servicemembers who serve a
minimum of 1 day in a combat zone are eligible to receive the combat zone
exclusion for the respective month. Enlisted members' exclusions are not
limited; however, officers can exclude up to the maximum earned by the
highest enlisted member.

Cost of Compensation Is Scattered Across Many Budgets

A total cost to compensate servicemembers does not exist in a single
source for decision makers to view, and transparency is further hindered
by the sheer number and types of pays, benefits, and tax preferences in
the military compensation system. Good business practice requires adequate
transparency over investments of resources, especially in times of fiscal
balance constraint. In a typical civilian firm, managers would know the
costs of compensation among other investments, such as capital and
technology, in order to make decisions on the most efficient use of
resources because decision makers have to consider both the obvious and
implicit costs of their actions. Furthermore, federal accounting standards
are aimed at providing relevant and reliable cost information to assist
Congress and executives in making decisions about allocating federal
resources.10 Therefore, we believe it is good business practice for
decision makers to establish transparency over total compensation costs,
including the long-term cost implications of current decisions.

Because of the lack of a single source of compensation costs and the
number and types of pays and benefits that combine to make up the
compensation system, we had to gather information from multiple sources to
compile our estimate of the total costs to provide military compensation.
Funding for the numerous components of compensation resides in different
budgets (see table 1). For example, the funding for cash compensation that
servicemembers receive today, such as basic pay and housing allowance, are
in DOD's military personnel budget. Despite its name, this title does not
include all of the funding provided for military compensation and
benefits. Funding for noncash benefits, such as health care and education
assistance, is displayed partially in the department's Operation and
Maintenance budget as well as in the VA's budget. And, deferred benefits
like retirees' health care, which represent a significant portion of the
costs of compensation, have long-term cost associations and are not
adequately visible. Funding for military retirement is budgeted for on an
accrual basis in the military personnel budget, as is health care for
retirees over 65 years of age and their dependents.11 However, health care

10 GAO, Business Modernization: NASA's Integrated Financial Management
Program Does Not Fully Address Agency's External Reporting Issues,
GAO-04-151 (Washington, D.C.: Nov. 21, 2003). The Statement of Federal
Financial Accounting Standards Number 4, Managerial Cost Accounting
Standards, requires agencies to report the full cost of their programs in
their general-purpose financial reports aimed at assisting congressional
and executive decision makers in allocating federal resources.

11 Accrual funding sets aside monies for future obligations.

funding for retirees less than 65 years of age and their dependents is
appropriated annually in the Operation and Maintenance budget as part of
the Defense Health Program. In addition to DOD's deferred benefits, some
servicemembers are eligible for veteran's benefits after they leave the
military. These benefits, such as health care, pensions, and other
compensations, are funded annually through the VA's budget. Furthermore,
the lost federal tax revenue-the federal tax benefit servicemembers'
receive because part of their cash compensation is nontaxable-is not
displayed in a DOD budget exhibit for decision makers to consider when
assessing new proposals or changes to the compensation system. This amount
is significant: we estimate that it totaled about $6.4 billion in fiscal
year 2004. Furthermore, we should note that our calculations underestimate
the impact of compensation costs to the federal government annually,
because we did not include significant outlays for the unfunded
liabilities for current retirees' pay and health care benefits that are in
the Department of the Treasury's annual budget, which totaled $34.4
billion in fiscal year 2004. These unfunded liabilities are being paid out
of current appropriations, because the government has not always set aside
monies for future liabilities. In fact, the government did not start
setting aside monies for retirement pay until fiscal year 1985 or for
health care benefits for retirees until 2003.

Table 1: Total Costs to Provide Active Duty Servicemembers Compensation
(Source and Types)

    Federal department's budget and type of budget Component of compensation

DOD Military Personnel

o  Contains all cash compensation received by servicemembers in their "pay
check" while serving on active duty and some costs for benefits.

Cash components:

o  basic pay

o  allowances for housing and subsistence

o  special and incentive pays  o  other allowances Benefits:

o  retirement pay accrual

o  health care accrual for retirees over 65 years of age

o  survivor benefits

o  death gratuities  o othera

DOD Operations and Maintenance  o  DOD dependent schools (on-base schools)

o  Contains a number of benefits available to active duty servicemembers
and their  o  morale, welfare, and recreation programs (i.e., dependents
in various subcomponents, such as the Defense Health Program, child care
and exchanges) Defense Commissary Agency, Department of Defense Education
Activity, and the  o  commissaries Morale, Welfare, and Recreation exhibit
(OP-34).  o  health care for active duty servicemembers

and their dependents

o  education benefits

(Continued From Previous Page)

Federal department's budget and type of budget Component of compensation

DOD Future Years Defense Program (FYDP)  o  family housing upkeep and
utilities

o  A planning document published by DOD;  o  we were unable to identify
similar costs for

o  Contains costs for upkeep and utilities costs for on-base family
housing. barracks (on-base housing for single servicemembers)

Department of Veterans' Affairs Budget  o  Montgomery GI Bill (education
benefit)

o  Although the VA's primary customers are retired or honorably discharged
    o  Guaranteed Home Loan program servicemembers, current active duty
members are eligible for these education and home loan benefits.b

Department of Education  o  funding for local school systems impacted by

o  Funds provided to local school districts to offset the impact of lost
tax revenue military dependents because of military installations.

Department of Labor  o  employment assistance

o  Program for servicemembers who are leaving the active duty force and
seeking civilian employment.

Other costs  o  compensation and benefits for retirees and

o  Certain costs are not available in any budget. We estimated those costs
using various honorably discharged servicemembers methods:  o  health care
benefits for retirees under 65 and

o  The Office of Management and Budget provided an unofficial estimate of
accrual their dependents costs for current active duty members' future
veterans' benefits.  o  federal tax expenditure resulting from special

o 	DOD's Office of the Actuary provided accrual cost estimates for health
care nontaxable allowances benefits for retirees and their dependents.

o  We calculated lost federal tax revenue estimates based on information
from DOD and the federal tax code.

Source: GAO analysis.

Note: For more detailed information, see app. I.

a Other includes education benefits, savings deposit program, adoption
expenses, subsistence in kind, separation pay, partial dislocation
allowance, transportation subsidy, permanent change of station, social
security tax, unemployment benefits, and servicemembers' group life
insurance hazard payments.

b Upon joining active duty, servicemembers are enrolled in the Montgomery
G.I. Bill unless they opt out of the program. In fiscal year 2005, a
participating servicemember paid $1,200 into the program and, if enrolled
as full-time students at an approved educational institution, a
servicemember received as much as $12,000 annually.

Since the costs of compensation are scattered across the federal budget,
no one organization has visibility over the total costs of military
compensation. The lack of transparency over total costs to compensate
servicemembers impacts decision makers' ability to manage the system,
including (1) assessing the long-term cost implications, (2) determining
how best to allocate resources to ensure an optimum return on investment,
and (3) assessing the efficiency of the current compensation system on
DOD's ability to meet recruiting and retention goals. As a result, the
current compensation system is made up of a number of benefits and over 60
different pays and allowances that have been added piecemeal over the
years to address specific needs. The main problem with this piecemeal
approach is that it does not consider the system as a whole-and, as a
result, new initiatives are considered in isolation and often with little
consideration to how these will contribute to the ability of the military
compensation system to efficiently meet recruiting and retention goals and
if resources are being allocated to ensure the optimum return on
compensation investments within current and expected resource levels. For
example, in 2000 Congress enhanced retirement benefits to include health
care for retirees over 65 years old and their dependents.12 This
additional benefit came at significant costs, about $6.5 billion accrual
funding in fiscal year 2004 alone, and with little evidence of whether,
and if so how it contributes to the efficiency and effectiveness of the
compensation system in terms of recruiting and retention.

12 Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001, Pub. L. No. 106-398, Sec. 712 (Oct. 2000)

Lack of Principles to Guide Military Compensation Policy Is a
Long-standing Problem

Challenges associated with piecemeal changes and adjustments to the
military compensation system have been a long-standing problem with the
system. In 1979, we evaluated DOD's compensation system and concluded that
piecemeal adjustments and a lack of overall guiding principles of
compensation were a problem in establishing a basis for evaluating changes
to the total compensation system.13 As a result, we recommended that
Congress establish a permanent, independent military compensation board to
identify and recommend pay principles, see that pay principles are
appropriately implemented, and continuously monitor and make
recommendations for changing the military compensation system consistent
with the established principles. At the time, DOD officials believed that
military pay increases should be linked to federal civilian pay
increases-and that special and incentive pays could be used to alleviate
critical skill shortages. Officials disagreed that a board should be
established, indicating that it would be counterproductive to create a
"headless fourth branch" of government. However, the underlying problems
we pointed out in 1979-lack of explicit compensation principles and the
difficulty in making major changes to compensation-still exist today. The
Military Compensation Background Papers describe six principles that the
compensation system is designed to achieve; those principles are: managing
manpower, compatibility with the level of technology servicemembers
employ, equity, effectiveness in war and peace, flexibility, and
motivation.14 However, some 25 years later, these principles do not
provide clear policy and doctrine to guide military compensation policy as
described in this excerpt from DOD's Military Compensation Background
Papers:

"the relationships between the individual components of compensation and
their systemic interrelationships as a coherent structure remain largely
implicit rather than explicit. Virtually every aspect of military activity
has explicit doctrines, principles, and practices embodied in field
manuals, technical manuals, and various joint publications. Military
compensation is noteworthy in its lack of such an explicit intellectual
foundation."

Furthermore, the Secretary of Defense tacitly admitted the difficulty in
changing military compensation from inside the department when he

13 GAO, The Congress Should Act to Establish Military Compensation
Principles, GAO/FPCD-79-11 (Washington, D.C.: May 9, 1979).

14 Department of Defense, Office of the Secretary of Defense, Military
Compensation Background Papers: Compensation Elements and Related Manpower
Cost Items, Their Purposes and Legislative Backgrounds, sixth ed.
(Washington, D.C.: April 2005).

formed an independent advisory committee to study compensation in 2005. Of
particular concern to the department was the growth in entitlement
spending for things like health care and the appropriateness of the mix of
in-service and post-service compensation. However, Congress has taken
certain measures to enhance post-service compensation or benefits that DOD
has not requested or in some cases has discouraged, such as the expansion
of concurrent receipts for retirees with disabilities. At the time of this
report, the Secretary of Defense's committee was just beginning its work;
however, the Secretary had requested the committee provide an interim
report by September 2005 and conclude its work by spring 2006.

In order to achieve lasting and comprehensive change, organizations need
sustained top leadership to help make significant and systematic changes
become a reality and sustain them over time. We have recently recognized
and suggested that to achieve such leadership a Chief Management Official
with responsibility for DOD's overall business transformation efforts
should be created.15 We believe the long-standing lack of explicit
principles and the difficulty in changing military compensation from
inside DOD is another example of how a Chief Management Official could be
beneficial to DOD.

Heavy Reliance on Benefits May Not Be Appropriate for Meeting Key Human
Capital Goals or Not Sustainable in the Long Term

The federal government's total costs to compensate its active duty
servicemembers have increased significantly in the past 5 years, and given
that costs are heavily weighted toward noncash and deferred benefits, the
structure of the current compensation system raises questions about the
reasonableness, appropriateness, and long-term affordability and
sustainability of DOD's approach to compensating its military workforce.
Between fiscal years 2000 and 2004, overall compensation costs increased
from $123 billion to $158 billion-or about 29 percent, in 2004 dollars.
Increases in costs were primarily driven by basic pay, allowances for
housing, and health care benefits. Furthermore, over half of the mix of
compensation costs is in the form of noncash and deferred benefits, which
stands in contrast to private sector and federal civilian organizations
that tend to rely more heavily on cash pay, and less on benefits. Military
analysts have noted that benefits, especially deferred benefits like
retirement, are a relatively inefficient way to influence recruiting and
retention, compared to cash pay.

15 GAO, Key Elements Needed to Successfully Transform DOD Business
Operations, GAO-05-629T (Washington, D.C.: Apr. 28, 2005).

Compensation Costs Have Significantly Increased

The total cost to the government to provide compensation for active duty
members has grown about 29 percent, adjusted for inflation, between fiscal
years 2000 and 2004, as shown in figure 1. Over this same time period, the
number of active duty troops remained relatively constant at about 1.4
million people, but military compensation costs grew from $123 billion to
$158 billion in fiscal year 2004 dollars annually.16 We estimate that the
average cost of compensation per servicemember (i.e., both enlisted
personnel and officers) in 2004 was about $112,000. Three things are
important to understand about our estimate. First, it is an average of
what it cost the government to compensate servicemembers, not what the
servicemembers "receive in their paycheck." Individual cash compensation
will vary significantly based on rank and other factors. Furthermore, the
value of benefits also varies significantly depending on individual
circumstances. Second, because agencies other than DOD provide
compensation to servicemembers, our estimate includes costs appropriated
to The Department of Veterans Affairs, the Department of Education, and
the Department of Labor as well as the lost tax revenue as a result of
special tax advantages received by military personnel among others.17
Third, it does not represent the marginal cost of adding servicemembers,
because it does not include significant costs for acquiring and training
military personnel. Such costs are substantial: DOD officials told us that
the cost for training can be as much as $36,000 per person if a broad
range of training costs are included.

Recently, other defense analysts have made attempts to estimate the cost
of compensation. While these estimates vary based on what costs are
included in their analyses, the trends are the same. For example, the
Congressional Budget Office (CBO) estimated that in 2002 compensation cost
about $99,000 per active duty servicemember. DOD's Office of Program
Analysis and Evaluations calculated all military compensation costs to be
approximately $117,000 per servicemember in fiscal year 2004.

16 Our calculations of compensation costs include supplemental funding for
the war on terrorism. According to DOD officials, in fscal year 2004 of
the $158 billion over $17 billion was supplemental funding.

17 Our cost calculations capture cost to the federal government. As a
result, we included costs assumed by other areas of government to
compensate active duty servicemembers. These costs include the lost tax
revenue because housing and subsistence allowances are not subject to
federal income tax or Federal Insurance Contributions Act (FICA) tax as
well as the estimated accrual cost of providing compensation-such as
pension and health care-through the VA.

Other DOD officials have done similar work which included compensation
costs; for example, officials in the Office of Secretary of Defense told
us they recently estimated DOD's cost to add an additional servicemember
at about $109,000 per servicemember. Navy officials have done detailed
work to estimate the cost of manpower to the Navy, and concluded that for
example, the standard programming rate for officers in pay grade O4 was
about $126,000 and about $79,000 for enlisted personnel in pay grade E-7;
however, these costs do not include health care accrual costs for
retirees.

Figure 1: Total Compensation Cost and Per Capita Cost for Fiscal Years 2000-2004

Fiscal year 2004 constant dollars in billions

                                      200

                                      180

                                      160

                                    155 158

                                      140

                                      120

                                     100 80

                                       60

                                       40

                   20 0 2000 2001 2002 2003 2004 Fiscal year

                            2000 2001 2002 2003 2004

                                                  Percentage change 2000-2004

                  Total compensation  123      131     141     155   158   29 
                       (in billions)                                       
                    End strength (in  1.37    1.37    1.40    1.42  1.41    3 
                            millions                                       
                     Per capita cost 89,636 95,096 100,894 109,245 111,783 25 
                         Source: GAO                                       
                           analysis.                                       

Note: Our per capita costs are based on active duty end strength.
According to DOD officials, since fiscal year 2002 over 100,000 mobilized
reservists were paid out of the active duty compensation

budget. If you considered these personnel, the average costs to provide
compensation would be about $5,000 lower.

Military Compensation Components Driving Total Cost

Growth in military compensation is attributed, primarily, to increases in
(1) basic pay, (2) allowances for housing, and (3) health care cost.

o 	Basic pay, found in the military personnel budget, increased from $38.4
billion to $47.4 billion from fiscal years 2000 to 2004-an increase of
about 23 percent-and is the largest component of the compensation
system.18 DOD has asked for and Congress has supported sizable
across-the-board raises in basic pay in order to address concerns that
military members may be underpaid compared to comparable educated civilian
counterparts. From fiscal years 2000 to 2004 the average pay increases to
servicemembers exceeded average wage increases for all private sector
employees.

o 	Allowances for housing, found in the military personnel budget,
increased by about 66 percent from $7.3 billion to $12 billion between
fiscal years 2000 to 2004. Prior to fiscal year 2001, DOD's policy was for
members to pay for 15 percent of their housing costs out of pocket;
however, in fiscal year 2000, DOD introduced the "zero out of pocket"
initiative that increased servicemembers' housing allowances to eliminate
their out-of-pocket expenses by fiscal year 2005.19 This effort was to
encourage servicemembers to live off-base and is consistent with DOD's
policy that states it is the department's preference for servicemembers to
live in civilian housing.

18 We adjusted for inflation using DOD's military personnel (MILPERS)
deflator. Between fiscal years 2000 and 2004 military pay increases
averaged over 21 percent. This compares to a 9.7 percent increase for
fiscal years 2000 through 2004 for the all urban workers Consumer Price
Index (CPI) and a 13.3 percent increase in the Employment Cost Index (ECI)
for civilian wages and salaries over the same period.

19 GAO, Military Personnel: Higher Allowances Should Increase Use of
Civilian Housing, but Not Retention, GAO-01-684 (Washington, D.C.: May 31,
2001).

o 	Health care costs, including the costs for active duty servicemembers
and their dependents as well as accrual costs for retirees and their
dependents, increased from about $13.8 billion to $23.3 billion between
fiscal years 2000 and 2004, an increase of about 69 percent. This increase
is attributable, in part, to the fiscal year 2002 expansion of health care
benefits to retirees over 65 years of age to cover them and their
dependents for life.20 DOD raised concerns about expanding entitlements,
such as health care, that do not provide them leverage over readiness.
Also contributing is the higher-than-average increase in costs of medical
care. A 2003 study by CBO projected that if DOD's medical spending
increases at the same rate as per capita medical spending in the United
States, as a whole, it could increase to possibly as much as $52 billion,
or $38,000 per servicemember in 2002 dollars, by 2020.21 These costs
include (1) current appropriations from the operations and maintenance,
defense health program budget, for current servicemembers and their
dependents; and (2) estimated accrual costs for retirees and their
dependents from the DOD actuary.22 Given CBO's projections of substantial
growth in future costs and the 69 percent increase over the past 4 years,
serious questions about the affordability and sustainability of the
current compensation system arise.

Officials within the department told us that they sought increases in
basic pay and housing allowances because they think investments in these
types of compensation are more efficient in meeting the department's
recruiting and retention goals. Furthermore, continued, significant
increases in these areas-especially health care costs, which could exceed
$50 billion annually by 2020-raise questions about the long-term
affordability and sustainability of the current compensation approach. The
summary of military compensation components displayed in table 2 shows the
percentage changes in costs between fiscal years 2000 and 2004.

20 GAO, Defense Health Care: Observations on Proposed Benefit Expansion
and Overcoming TRICARE Obstacles, GAO/T-HEHS/NSIAD-00-129 (Washington,
D.C.: Mar. 15, 2000).

21 Congressional Budget Office, Growth in Medical Spending by the
Department of Defense (Washington, D.C.: September 2003).

22 In fiscal year 2003, DOD began budgeting for the accrual cost of health
care for retirees over age 65 and their dependents. This cost is in the
military personnel budget. However, health care for retirees under 65 and
their dependents is not currently budgeted for on an accrual basis.

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

2004 constant dollars in billions

Fiscal year Fiscal year Percentage Components of compensation 2000 2004
change Cash

                                    Basic pay      $38.4                $47.4 
                            Housing allowance             7.3            12.0 
                        Subsistence allowance             3.1             3.4 
                   Special and incentive pays             3.3             4.3 
                                   Allowances             1.9             3.5 
                                Tax advantage             5.3             6.4 
                                   Total cash      59.3                  77.0 

                                Noncash benefits

                        Subsistence in kind     1.2         3.5           185 
                                     Othera    10.3        10.0           (3) 
                                 Educationb     .4          .7      
               Installation based benefitsc     4.4         5.2     
                                Health care     8.7         9.7     
                Family housing and barracks     3.2         3.1           (1) 
                              Total noncash    28.2        32.2     

Deferred benefits

            Retired pay accrual            12.2         12.8             5 
        VA compensation and pension             9.0     11.1            23 
              VA health care                    8.4     10.3            23 
                 VA other                        .9     1.1             23 
            Health care accrual                 5.1     13.6           166 
              Total deferred               35.6         48.9            38 
            Total compensation            $123.1       $158.1           29 

Source: GAO analysis.

Notes: According to DOD officials, there were over 100,000 mobilized
reservists paid out of the cash compensation in fiscal year 2004. For more
detail on sources, see app. I.

a Includes separation pay, partial dislocation allowance, transportation
subsidy, permanent change of station, adoption expenses, savings deposit
program, other personnel support, special support, social security tax,
unemployment benefits, special compensation, VA home loan, death
gratuities, survivor benefits, and other costs.

b Includes education, off-duty voluntary education, and servicemember GI
bill and certification.

c Includes exchanges, commissaries, childcare, DOD dependent schools, and
other morale, welfare, and recreation costs.

In addition, special and incentive pays grew about 30 percent-from $3.3
billion to $4.3 billion-from fiscal years 2000 through 2004. This increase
is substantial on a percentage basis, but special and incentive pays are
not driving the overall budget trends because the amount is a relatively
small portion of the overall compensation cost. By our calculations, these
special pays only represent about 6 percent of cash compensation, and
about 3 percent of total compensation, on average. DOD has more than 60
different special pays that fall into this category including reenlistment
bonuses and hazardous duty pay, as well as other pays for specific duties
like aviation, medical, and incentives for servicemembers to take certain
assignments among others. Because most compensation is determined by
factors such as tenure, rank, location, and dependent status, these
special pays and allowances are the primary monetary incentives DOD has
for servicemembers other than promotions.

Heavy Emphasis on Benefits Reflects DOD Commitment to Servicemembers and
Their Families, but Is Unlike Civilian Counterparts and Inefficient for
Recruiting and Retention

Noncash and deferred benefits made up just over half of the total costs of
providing military compensation since 2000. DOD has historically viewed
noncash benefits as critical to morale, retention, and the quality of life
for servicemembers and their families. In April 2002, DOD issued a
strategic human capital plan addressing quality-of-life issues and
benefits. According to DOD officials, the plan, entitled A New Social
Compact: A Reciprocal Partnership Between the Department of Defense,
Service Members and Families, is needed to ameliorate the demands of the
military lifestyle, which includes frequent separations and relocations,
and to provide better support to servicemembers and their families. It
emphasizes the need to maintain programs and services viewed as benefits
by servicemembers. Furthermore, we recently reported that DOD has
instituted a number of benefits that reflect demographic changes in the
active duty force- primarily the increase in servicemembers with family
obligations.23 Compared to civilians in government and in the private
sector, the military's compensation costs are much more heavily weighted
toward benefits and deferred compensation like retirement and health care
for retirees.

23 GAO, Military Personnel: Active Duty Benefits Reflect Changing
Demographics, but Opportunities Exist to Improve, GAO-02-935 (Washington,
D.C.: Sept. 18, 2002).

Efficiency, as defined by DOD, is the amount of military compensation-no
higher or lower than necessary-that is required to fulfill the basic
objective of attracting, retaining, and motivating the kinds and numbers
of active duty servicemembers needed.24 However, the efficiency of some
benefits is difficult to assess because the value that servicemembers
place on them is different and highly individualized. It is generally
accepted and a recent study indicates that some deferred benefits, such as
retirement, are not valued as highly by servicemembers as current cash
compensation.25

Military Compensation System Is In fiscal year 2004, noncash and deferred
benefits made up about 51

Weighted Toward Noncash and percent of total compensation costs, on
average. This means that it costs

Deferred Benefits	the government more to provide benefits and deferred
compensation than current cash compensation. Of this, deferred benefits
represented a significant portion of noncash compensation, as figure 2
shows. Since 2000, deferred benefits have made up about one-third of total
compensation costs. These benefits are the promise of future
compensation-like retirement pay and health care as well as other
benefits-for active duty servicemembers who retire with at least 20 years
of service or who leave the force and become eligible for veterans
benefits. Deferred benefits impact the current cost of compensation
because monies must be set aside today to provide these benefits in the
future, over the servicemember's lifetime.

24 Department of Defense, Office of the Secretary of Defense, Military
Compensation Background Papers: Compensation Elements and Related Manpower
Cost Items, Their Purpose and Legislative Backgrounds (Washington, D.C.:
Sixth edition, April 2005).

25 John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (March
2001).

Figure 2: The Allocation of Cash, Noncash, and Deferred Compensation Costs
per Active Duty Servicemember in Fiscal Year 2004

Total cost to provide compensation was about $112,000 per active duty
member benefits made up about 51 percent of this cost.

                               Noncash benefits:

                                                          Health care  $6,829 
                                                   Installation-based         
                                                             benefits   3,700
                                                       Subsistence in         
                                                                 kind   2,455
                                                   Family housing and   2,221 
                                                   barracks           
                                                            Education     466 
                                                       Other benefits   7,093 
                                                        Total noncash $22,765 
                                                             benefits 

                               Deferred benefits:

                                                          Retired pay  $9,072 
                                                              accrual 
                                                      VA compensation   7,839 
                                                          and pension 
                                                       VA health care   7,303 
                                                             VA other     771 
                                                          Health care         
                                                              accrual   9,643
                                                       Total deferred         
                                                             benefits $34,629

Cash compensation:

Basic pay $33,502 Housing allowance 8,507 Subsistence allowance 2,380
Special and incentive pays 3,021 Other allowances 2,441 Federal tax
advantage 4,538 Total cash compensation $54,389

Source: GAO analysis.

Note: Over 100,000 mobilized reservists were paid out of total cash
compensation. Accounting for those reservists, the average cash
compensation was about $49,000 per servicemember. These costs reflect the
average costs to the government to provide these components of
compensation. For example, all servicemembers do not receive a cash
housing allowance, because some servicemembers live on base in family
housing or barracks. The cost presented represents the total amount
appropriated for housing allowances divided by the number of
servicemembers, thus, an average cost to the government.

Civilian Compensation Emphasizes Salary and Wages

While it is difficult to make direct comparisons between military and
civilian compensation because of the accessibility of some benefits (e.g.,
health care, retirement to private sector employees), it seems clear that,
in general, DOD compensation is weighted much more heavily toward
benefits. Some private sector organizations and the federal government
provide benefits similar to those provided by the military, such as
retirement, health care, paid time off, and life insurance; military
benefits, in some instances, far exceed those offered by the private
sector, such as free health care and housing as well as discount
shopping.26

In contrast to the mix of compensation for the military, figure 3 shows
that civilian counterparts in the private sector and the federal
government receive, in broad terms, most of their compensation in cash
salary/wages. Civilians in private industry, on average, received about 82
percent in salary and wages while federal government civilians received
about 67 percent in salary and wages. Thus, one third or less of these
workers' compensation is typically in the form of benefits or deferred
compensation.

26 GAO, Military Personnel: Active Duty Benefits Reflect Changing
Demographics, but Opportunities Exist to Improve, GAO-02-935 (Washington,
D.C.: Sept. 18, 2002).

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

Private industry -Total average costs of compensation $50,509

Civilian federal government -Total average costs of compensation $92,330

Current Mix Is Highly Inefficient for Recruiting and Retention

                                    Benefits

                                 Salary/ wages

The mix of compensation is highly inefficient for meeting near-term
recruiting and retention needs. Cash pay today is generally accepted as a
far more efficient tool than future cash or benefits for recruiting and
retention. Because the preference for cash is particularly strong in young
adults, this adage is especially true for the military because the active
duty workforce is mainly comprised of people in their twenties. For
example, a recent study offering servicemembers a choice of lump-sum
payments or annuities found that a vast majority of servicemembers
preferred a lumpsum cash payment versus deferred compensation in the form
of an annuity.27 According to the study, more than 50 percent of officers
and 90 percent of enlisted servicemembers had discount rates of at least
18 percent; that is, they value $1 received in 20 years to be worth only
about 4

27 John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (March
2001).

                                    Benefits

                                 Salary/ wages

             Note: Average compensation costs are in 2004 dollars.

cents today. The study also found that the preference for cash today was
particularly strong among younger servicemembers.

This "personal discount rate" has important implications for military
compensation policy, especially when it comes to considering deferred
benefits or compensation. Not only do people heavily discount the value of
future benefits, less than one in five in the military will receive the
most lucrative and costly benefits offered by the military, specifically
active duty retirement pay and health care benefits. This is because only
17 percent of those who join the military will ultimately serve a 20-year
career and thus earn nondisability retirement pay and health care for
life. Figure 4 illustrates that based on current actuarial assumptions, 47
percent of new officers and 15 percent of new enlistees attain 20 years of
active duty service.28 Thus, a significant portion of the compensation
budget-about 17 percent-is being allocated to provide for future
retirement pay and health care for current active duty members who will
become eligible to receive these benefits even though a relatively small
percent of the force will ultimately receive these benefits.

28 These percentages are based on a typical group of new entrants and do
not include those military personnel who began their careers on active
duty then moved to the reserves and retired from there.

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

In percent 100

90

80

70

60

50 47

40

30

20

10

0 Officer Enlisted Overall Source: DOD.

Taking together the personal discount rate and the relatively few
servicemembers who earn retirement benefits, defense compensation analysts
have suggested that this is an inefficient allocation of the overall
compensation investment. This insight is not new, and is likely a key
reason why private sector companies have such a high proportion of cash in
their compensation mix. Thus, DOD's current approach to compensation
raises serious questions about the reasonableness and appropriateness of
continuing to weight compensation toward noncash and deferred benefits.
However, DOD officials told us they feel that this efficiency argument
about entitlements is often outweighed by the desire in DOD and in
Congress to "take care" of servicemembers and their families. This makes
adjusting compensation extremely difficult for decision makers, especially
amid concerns of eroding benefits, as discussed later in this report. When
concerns have arisen, benefits have often been added with little
consideration of what they will cost, how they compare with overall market
data, whether costs are affordable and sustainable over the long term, or
their effectiveness and return in terms of recruiting or retention. The
cumulative effect of this approach raises serious questions about the
reasonableness, appropriateness, affordability, and sustainability of the

current military compensation system in light of 21st century trends and
challenges.

DOD's Lack of an Effective Communication and Education Effort on
Compensation Has Allowed Servicemembers' Misperceptions and Concerns about
Their Compensation to Perpetuate

According to DOD surveys and analysis of our focus group findings and
survey data, many servicemembers are dissatisfied, and in some cases,
harbor significant misperceptions about their pay and benefits in part
because DOD does not effectively educate them about the competitiveness of
their total compensation packages. This has led to an atmosphere of
perpetual dissatisfaction and misunderstanding about compensation among
servicemembers. Servicemembers tend to be more satisfied with their total
compensation packages than with specific aspects of their pay and
benefits. They continue to express dissatisfaction with specific aspects
of their compensation. In our focus groups, servicemembers had
misperceptions about compensation; specifically (1) they underestimated
the costs of their compensation and how it compares to civilian wages, (2)
were unaware of or confused about certain aspects of their compensation,
and (3) were concerned about erosion of benefits.

Servicemembers Have Found DOD's Efforts to Educate Them about Their
Compensation Unreliable and Difficult to Access

It is industry best practice for employers to educate employees about the
value of their pay and benefit components of their compensation. We also
believe that by communicating the value of the compensation investment and
ensuring it is understood, DOD will ensure an increased return on their
investment because employees who know the value of their total
compensation packages are more likely to be engaged and motivated in their
work. In addition, past studies suggest that revealing more information
about components of compensation has a greater impact on the component's
satisfaction rate than the actual amount itself.29 Servicemembers,
especially enlisted personnel, said they frequently relied on unofficial
sources of information, such as word of mouth or service newspapers. Many
servicemembers discussed how the official sources of information available
are often difficult to access or appear to them to be dishonest or
misleading.

29 Improve Base Pay Return on Investment by Increasing Employee Knowledge.
WorldatWork, 2002. Creating an Effective e Statement: A Primer. Watson
Wyatt World Wide 2004.

DOD makes various efforts to educate servicemembers by providing annual
earnings statements (see app. II for a sample of Personal Statement of
Military Compensation) providing online information on compensation, and
providing servicemembers access to personnel specialists to answer
questions. However, servicemembers stated that the online services
frequently are down or that it is difficult to access services such as the
"myPay" Web site.30 DOD officials acknowledge that access to the "myPay"
Web site has been a long-standing, recognized problem that is a result of
efforts to ensure the security of the personal pay information available
on the site. Over half of our focus groups commented on how unhelpful
official sources are to them in understanding aspects of compensation.
Many stated that the annual earnings statement, at times referred to
despairingly in our focus groups as the "lie sheet," was not believable
because they do not understand how the amounts identified as their total
compensation (noncash and deferred) were calculated.31 Enlisted members
and officers told us that they felt recruiters and personnel specialists
often gave misguided information or could not provide answers to
servicemembers' questions on compensation. Additionally, members often
discussed how the lack of comprehensive communication and education on
compensation is a problem because they often find themselves unaware of
certain additions or changes to their pay and benefits. Servicemembers
offered suggestions as to how to improve education on compensation by
consolidating information into a single location to obtain information on
all pay and benefit elements, while assuring it is clearly accessible and
easy to understand. DOD officials acknowledge that generally
servicemembers do not realize the full value of their compensation and
have misperceptions about their compensation. The Defense Finance and
Accounting Service is implementing tools to address these problems. To
date, they have developed a newsletter-that provides information on
changes to compensation or information about compensation that is widely
misunderstood or unknown, such as how to get a "myPay" Web site access
code, and bulletins that provide information on specific topics of
interest

30 "My Pay" is a Web site maintained by DOD's Defense Financial Accounting
Service. It provides servicemembers online access to their Leave and
Earnings statements as well as other related compensation issues-such as
tax deductions.

31 Annual earnings statements called the Personal Statement of Military
Compensation are mailed to Army, Air Force, and Marine Corps
servicemembers annually and provide them personalized information about
the amount of cash pay they receive as well as general information about
the value of their benefits. For example, servicemembers are provided an
estimated value of their health care if they were to buy similar coverage
in the civilian market.

that are sent to Army personnel and plan to expand these tools to the
other services.

The efforts made to date by DOD to explain the value and competitiveness
of compensation stands in contrast to the substantial investment the
department makes to recruit new members. As of fiscal year 2003, the
department was spending over $13,000 per enlisted recruit for advertising,
bonuses, incentives, and recruiter pay and support.32 We do not have
comparable data on what the department spends to educate servicemembers on
compensation, but DOD officials told us that it has not been a priority
department wide and DOD has never mounted a comprehensive campaign to
explain the competitiveness of its compensation to servicemembers.

Servicemembers Tend to Be More Satisfied with Their Total Compensation
Package than with Specific Aspects of Their Compensation

During the 1990s, the military benefit package was significantly enhanced
in response to servicemembers' concerns of eroding benefits; yet
servicemembers have continued to express dissatisfaction with many aspects
of their compensation. In the 2002 Status of Forces Surveys of Active Duty
Servicemembers, participants were asked to rate their satisfaction with
specific components within their military compensation. As figure 5 shows,
a substantial percentage of servicemembers were dissatisfied with numerous
aspects of their compensation, including basic and special pays and
housing and subsistence allowances.

During more than half of our focus groups, servicemembers cited base pay,
the subsistence and housing allowance, and special and incentive pays as
reasons for dissatisfaction along with health care and others. In general,
officers tended to be more satisfied with base pay than were enlisted
personnel. Six of the eight focus groups with senior enlisted
servicemembers expressed dissatisfaction with their pay especially
compared to junior officers, who the senior enlisted servicemembers
perceive as having less experience and relying on them for on-the-job
training. While members recognized that there have been improvements in
the housing allowance with DOD's recent effort to increase the
allowance,33

32 GAO, Military Recruiting: DOD Needs to Establish Objectives and
Measures to Better Evaluate Advertising's Effectiveness, GAO-03-1005
(Washington, D.C.: Sept. 19, 2003).

33 In fiscal year 2000, the Secretary of Defense introduced an initiative
to increase housing allowances so that servicemembers would be paying
nothing out of pocket for rent and utilities by fiscal year 2005.

they complained that these increases have had little effect because they
perceive that landlords increase rent by the same amount. Additionally, 8
of our 40 focus groups discussed how it is unfair that servicemembers with
dependents receive more housing allowance than single members. Moreover,
members had varying perceptions about special pays and incentives. Some
were dissatisfied with the amount of special pays and thought they should
be increased. Others were dissatisfied because it was unclear to them why
everyone does not receive special pays. This is particularly true for
senior enlisted pay grades that are ineligible for reenlistment bonuses.
Furthermore, health care was most frequently discussed as a source of
dissatisfaction as well as satisfaction. While servicemembers were
satisfied with the minimal to no cost of health care for themselves and
their family, 31 of our 40 focus groups commented on their dissatisfaction
with the quality and access to health care. Additional reasons of why
servicemembers most frequently reported these components and others as
sources of dissatisfaction are listed in figure 5.

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

Source: Defense Manpower Data Center and GAO analysis.

Note: For the Active Duty Status of Forces survey, DMDC utilized
stratified random sampling, where all members of a population are
categorized into homogeneous groups, procedures to ensure adequate sample
sizes for their reporting categories, thereby creating generalizable
findings with a sampling

error of +/- 2 percent. Our focus group survey results are not
generalizable because we did not use random sampling to collect the data.
For more information on our focus group methodology see app. I.

a We asked servicemembers separate questions about their satisfaction with
medical and dental care. The numbers reflected above are servicemembers'
dissatisfaction with medical care. Nineteen percent of enlisted personnel
and 12 percent of officers reported they were dissatisfied with their
dental care, while 40 percent of enlisted personnel and 32 percent of
officers reported they were dissatisfied with their families' dental care.

Although servicemembers expressed dissatisfaction with certain pays and
benefits, many were more satisfied when considering compensation as a
whole in the Status of Forces survey. DOD surveys in 2003 and 2004 showed
that about 47 percent of servicemembers were satisfied with their overall
cash compensation (i.e., base pay, allowances, and bonuses), which is
significantly more than their satisfaction with specific aspects of their
compensation. This was evident during our focus groups as well:
servicemembers were often more satisfied with their compensation overall
than they were with specific aspects of their compensation, like the
housing allowance.

Despite their dissatisfaction with many aspects of their compensation,
servicemembers expressed a clear preference for cash when asked if they
would make any changes to the compensation system. In 35 of our 40 focus
group sessions, servicemembers were willing to decrease their noncash
benefits if those benefits were replaced with cash. For example,
servicemembers in our focus groups said that they prefer frequenting
off-base discount stores more than the commissaries and exchanges. Also,
servicemembers in our focus groups said they would prefer the cash
equivalent to their medical coverage in order to obtain their own health
care because of their dissatisfaction with the present choice.
Servicemembers, especially junior officers who said they do not intend to
stay in the military for a full 20-year career, told us that they would
prefer DOD to give them cash that they could invest toward their
retirement.34 Comments like these, which we heard frequently, seem to
support past studies indicating servicemembers have a strong preference
for cash compensation today.35 However, such personal preferences were
offset by other concerns. Specifically, during 16 of our 40 focus group
sessions, servicemembers expressed concern that if they were to receive an
increase

34 The current retirement system requires servicemembers to generally
serve 20 years before becoming eligible for nondisability retirement pay
and benefits.

35 John T. Warner and Saul Pleeter, "The Personal Discount Rate: Evidence
from Military Downsizing Programs," The American Economic Review (March
2001).

in cash it would not equal the value of their current noncash or deferred
benefit. Or, changing to more cash compensation might not be in the best
interest of all members, especially the junior enlisted personnel, who
might not manage their finances well.

Servicemembers in Our During our focus group discussions, servicemembers
(1) underestimated Focus Groups Expressed the cost of their compensation
and how their compensation compares to Certain Misperceptions and civilian
wages, (2) were unaware of or confused about certain aspects of

their compensation, and (3) were concerned about erosion of
benefits.Concerns about Their These findings suggest that a culture of
dissatisfaction and Compensation misunderstanding about compensation
exists among servicemembers.

Underestimation of Total Compensation

Servicemembers consistently underestimated how their pay compares to the
private sector. Almost 80 percent of servicemembers participating in our
focus groups reported in our survey of focus group participants that they
believe they are paid less than their civilian counterparts.36 In
addition, during the focus groups servicemembers frequently discussed how
they were dissatisfied with their military pay because they believe that
they could make more "on the outside" as a civilian.37 Moreover, when
asked how much DOD spends on cash pays, retirement, and health care for
them, 9 out of 10 servicemembers participating in our focus groups
underestimated how much it cost to provide their compensation.

36 We asked focus group participants to identify their civilian
counterparts and how their pay compared with the counterpart they
identified.

37 Between fiscal years 2000 and 2004 military pay increases averaged over
21 percent. This compares favorably to the 9.7 percent increase in the
urban workers Consumer Price Index (CPI) over the same period. Subtracting
the 9.7 percent from the 21 percent yields the real wage growth of
military personnel of over 11.3 percent. Compared to the Employment Cost
Index (ECI) military wages grew over 7.7 percent more (21 percent minus
13.3 percent) than did civilian wages and salaries over the same period.

While some specific skill groups could likely make considerably more in
civilian jobs, such perceptions of noncompetitive compensation seem to be
inaccurate in broad terms. The most recent Quadrennial Review of Military
Compensation-a DOD commission that reviews military compensation- found
that cash compensation fares favorably overall to civilian wages.
Specifically, they compared cash compensation (including tax advantage,
but not including special pays or benefits) with comparably educated
civilians. They found that, on average, military pay was at the 70th
percentile or higher of civilian wages.38 It should also be noted that
this review of military compensation found that, based on historical data,
when DOD pays servicemembers at around the 70th percentile of civilian
wages it is competitive in the employment market-that is, DOD has
generally not experienced recruiting or retention problems when
compensating servicemembers at this level. In sum, this means that DOD
seeks to pay servicemembers competitive cash wages when compared to
civilians and, at the same time, provides increasingly expensive benefits
that are in most cases much greater than those provided by the private
sector.

Lack of Awareness or Although most servicemembers were aware that their
compensation was a Understanding of Aspects of complex mix of cash and
benefits, some servicemembers were unaware of

                                  Compensation

certain aspects of their compensation; for example, servicemembers were
not aware of which retirement system they fell under or specifics about
their retirement benefits. Some servicemembers expressed confusion on the
repeal of the REDUX retirement system or did not realize that retired
members and their dependents now receive health insurance for life under
the military's healthcare system, TRICARE. Also, servicemembers did not
understand and had misperceptions about many components of their cash
compensation. For instance, some enlisted members were unsure as to how
special pays were allocated, while others were not as familiar with the
federal tax advantage they receive. Additionally, servicemembers showed
frequent misperceptions about the subsistence allowance being designed for
the member and not the family. Moreover, servicemembers often complained
of how they did not know how to access information about health care
benefits for their family.

38 Officers were compared with civilians who have 4-year college degrees,
while enlisted members were compared with civilians who have high school
diplomas and some college.

In contrast to pay and benefits, focus group participants seldom raised
deferred compensation as a reason for dissatisfaction or satisfaction, and
few junior enlisted personnel included deferred benefits when describing
their compensation. Some servicemembers expressed concern about losing
deferred benefits that were implicitly promised to them as part of joining
the military. In addition, a majority of the focus groups did not
recognize veterans' benefits as a component of their military
compensation. Of the servicemembers who discussed veterans' benefits, they
focused on the home loan program.39

Concern about Eroding Benefits	During the 1990s, some servicemembers
expressed concerns that their benefits were eroding, particularly their
health care and retirement benefits. In response to such concerns, the
military benefit package has been significantly enhanced. In recent years,
for example, Congress restored retirement benefits that had previously
been reduced for some servicemembers, significantly expanded their
retirement health benefits, and allowed concurrent receipt of disability
and retirement pay. However, leaders in both the enlisted and officer
ranks in our focus groups were concerned that their benefits have still
been eroding despite these recent efforts. They often talked about
retirement benefits worsening as well as about decreases in base services
provided through the Morale, Welfare, and Recreation organization-such as
outdoor recreational equipment discounted rentals.

Conclusions	DOD is maintaining an increasingly expensive and complex
military compensation system comprising a myriad of pays and benefits.
With the costs scattered across the federal budget, decision makers within
the administration and Congress have insufficient transparency over the
total costs to compensate servicemembers, particularly with respect to
deferred costs, such as TRICARE-which is projected to experience explosive
growth in the future. Moreover, changes to the compensation system are
made in a piecemeal fashion with an imprecise understanding of how the
changes will affect the total cost of compensation or what return on
investment decision makers should expect in terms of recruiting and
retention. This lack of transparency is becoming a more urgent matter
today as DOD and all federal agencies face tough choices ahead managing

39 The Department of Veterans Affairs offers different programs to active
duty members such as the Montgomery GI Bill, which provides education
assistance, and a guaranteed home loan program, which provides
government-backed mortgages to buy homes.

the serious and growing long-term fiscal challenges facing the nation. For
DOD, these trade-offs could become as fundamental as investing in people
versus investing in hardware-tough choices for a military with aging
infrastructure and equipment that could have readiness implications in the
future. Compiling comprehensive information about the total cost of
compensation-as well as how it is allocated to cash and benefits-would be
a crucial first step for the department and Congress to lay a foundation
for future decisions. Without such information, decision makers at DOD and
Congress do not know what it is costing the government to compensate
servicemembers. Furthermore, DOD has not performed the analysis necessary
to determine whether its current allocation to cash and benefits is
reasonable or appropriate. With dramatic increases in compensation costs
and an expanding budget-mostly resulting from supplemental appropriations
from Congress to fund activities and operations related to the Global War
on Terrorism-it is highly questionable whether the rising costs and
current allocations are affordable and sustainable over the long term,
especially when supplemental funding recedes. Again, because DOD's
compensation system lacks transparency over these issues, the decision
makers in the administration and Congress cannot adequately assess whether
DOD's current approach to compensation is most efficiently meeting its
needs for both today and tomorrow.

DOD also faces a sobering marketing challenge-convincing skeptical
servicemembers that their compensation is competitive, overall. The
department's efforts thus far have been ineffective, and military members
are still dissatisfied with key aspects of their compensation, and harbor
several misperceptions and concerns that their compensation is eroding, or
will in the future. Pay comparison studies conducted by DOD, however, show
that military compensation is quite competitive even without considering
benefits. Recent efforts to improve benefits for retirees have done little
to address dissatisfaction among current members. This dilemma exists for
two reasons: (1) while servicemembers do not want to lose benefits, they
value future benefits much less than current cash; and (2) fewer than one
in five of those servicemembers who begin military service will ultimately
receive those benefits. Without more emphasis on marketing the value of
the cash pay as well as the total compensation received overall, DOD will
be unable to improve servicemember perceptions, which could have
implications for future recruiting and retention efforts.

Recommendations for Executive Action

To improve transparency over total compensation; to ensure the
compensation system is reasonable, appropriate, affordable, and
sustainable; and to better educate servicemembers about the
competitiveness of their compensation, we recommend that the Secretary of
Defense take the following three actions:

o 	Compile the total costs to provide military compensation and
communicate these costs to decision makers within the administration and
Congress-perhaps as an annual exhibit as part of the President's budget
submission to Congress. In preparing the annual exhibit, DOD may want to
work with the Office of Management and Budget.

o 	Assess the affordability and sustainability of the compensation system
and its implications on readiness as well as the reasonableness and
appropriateness of the allocation to cash and benefits and whether changes
in the allocation are needed to more efficiently achieve recruiting and
retention goals in the 21st century.

o 	Develop a comprehensive communication and education plan to inform
servicemembers of the value of their pay and benefits and the
competitiveness of their total compensation package when compared to their
civilian counterparts that could be used as a recruiting and retention
tool.

Matter for The Congress should consider the long-term affordability and
sustainability

of any additional changes to pay and benefits for military personnel
andCongressional veterans, including the long-term implications for the
deficit and militaryConsideration readiness. Furthermore, Congress should
consider how best to proceed

with any significant potential restructuring of existing military
compensation policies and practices, including whether a formal commission
may be necessary.

Agency Comments and 	DOD's comments are included in this report as
appendix III. DOD generally concurred with our recommendations, but raised
some technical concerns

Our Evaluation about the way we compiled compensation costs data.

DOD partially concurred with our first recommendation to compile the total
costs to provide military compensation and communicate these costs to
decision makers. In DOD's response, it noted that it agrees with the goal

of making total compensation costs transparent to decision makers;
however, the department noted that this may be a more appropriate issue
for the Office of Management and Budget since the costs extend to four
departments. As we noted in our report, lack of transparency over costs is
in part due to the sheer number of pays and benefits that make up the
military compensation system and the lack of a single source to show total
cost of compensation. By establishing transparency of total military
compensation costs, DOD would have a more complete picture of how its
military members are being compensated and be in the best position to
compile these costs for decision makers.

DOD concurred with our second recommendation and stated that it is already
engaged in multiple simultaneous efforts to assess the overarching
military personnel compensation strategy. In addition, DOD said that it
will continue to actively point out the impact of the legislative process
to Congress as it did with concurrent receipt, the survivor benefit
program, and expanding retiree health care.

DOD partially concurred with our third recommendation to develop a
comprehensive communication and education plan to inform servicemembers of
the value of their pay and benefits and the competitiveness of their total
compensation package when compared to their civilian counterparts. The
department acknowledged that there is a perception that military
compensation is underreported and undervalued, but pointed out that all of
the services as well as the Office of the Under Secretary of Defense for
Personnel and Readiness currently have multiple resources available for
servicemembers, including Web sites, such as the Navy's electronic pay and
compensation calculator, and brochures, such as the Air Force's
compensation fact sheet. We believe, as discussed in our report, that
these official sources are not effective, because of the continuing
dissatisfaction with compensation. DOD said that it will explore an
information/marketing campaign that will improve understanding of the
system.

DOD also raised technical concerns; specifically, it believed that we did
not adequately describe the impact of the increase in funding related to
the Global War on Terrorism as well as how we converted the costs to
constant year dollars. In its comments, DOD stated that the fiscal year
2004 compensation costs included over $17 billion in supplemental funding
for the war on terrorism, and much of this funding was used to pay for
mobilized reservists. While it is true that our estimates include
supplemental funding, we do not believe that the inclusion of this funding

changes our findings or conclusions. Supplemental funding represents real
costs to the federal government that we believe are appropriate to include
when calculating how much the federal government spends on compensating
military members. However, we took DOD's concerns into account and added
footnotes in our report to explain our approach. DOD also raised concerns
about our use of end strength instead of average strength in our per
capita calculations. We believe that end strength, which represents only
active population, is an appropriate denominator to calculate per capita
active duty costs because it provides a consistent population to spread
costs of cash, noncash benefits, and deferred benefits. To use average
strength, which includes mobilized reservists, would not have been an
accurate representation of active duty per capita costs for noncash and
deferred benefits. However, in response to this comment, we added
footnotes that indicate that the cash compensation for fiscal year 2004
includes costs for mobilized reservists and including those reservists in
our per capita calculations would have decreased cash compensation by
about $5,000 per servicemember. Finally, DOD raised concerns about our
adjustments for inflation in our data. We used the National Defense Budget
Estimates published by the Office of the Under Secretary of Defense
(Comptroller). According to the document, the deflators we used provide
inflation indexes in base years for each DOD appropriation title to be
used in converting total obligation authority from current to constant
dollars. To address DOD's concerns that the total cost data are not
accounting for the fact that the military pay raises have been larger than
other civilian pay raises, we added footnotes that compared military pay
increases, which averaged over 21 percent between fiscal years 2000 and
2004, to the all urban workers Consumer Price Index and the Employment
Cost Index for civilian wages and salaries, which over the same period
increased 9.7 percent and 13.3 percent, respectively.

We are sending copies of this report to the Secretary of Defense. In
addition, the report will be available at no charge on GAO's Web site at
http://www. gao.gov.

If you or your staff have any questions regarding this report, please
contact me at (202)512-5559 ([email protected]). Other staff members who
made key contributions to this report are listed in appendix IV.

Derek B. Stewart Director, Defense Capabilities and Management

List of Congressional Committees

The Honorable John Warner, Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Duncan L. Hunter, Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

The Honorable Lindsey Graham, Chairman
The Honorable Ben Nelson
Ranking Minority Member
Subcommittee on Personnel
Committee on Armed Services
United States Senate

The Honorable John M. McHugh, Chairman
The Honorable Vic Snyder
Ranking Minority Member
Subcommittee on Personnel
Committee on Armed Services
House of Representatives

The Honorable Ted Stevens, Chairman
The Honorable Daniel K. Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable C. W. Bill Young, Chairman
The Honorable John P. Murtha
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Appendix I

                             Scope and Methodology

Calculation of the Costs of Providing Active Duty Compensation

To calculate the cost of compensating active duty servicemembers to the
federal government, we interviewed officials from the Department of
Defense (DOD) including the Office of the Secretary of Defense,
Undersecretary for Personnel and Readiness' office of compensation, the
office of the Comptroller within the Office of Secretary of Defense and
the services, the Office of the Actuary, and Health Affairs. In addition,
we interviewed officials from Department of Veterans' Affairs (VA),
Department of Labor, Department of Education, Office of Management and
Budget, and the Congressional Budget Office. See table 4 for an overview
of our sources of information. In comparing the mix of cash and noncash
compensation of active duty servicemembers to that of private industry
employees and federal civilians, we used the Department of Commerce's
Bureau of Economic Analysis data to determine the typical percentage of
compensation that is allocated to salary/wages and benefits in private
industry and federal civilian compensation systems.

We examined and compiled data for fiscal years 2000-2004 from the Army,
Air Force, Marine Corps, and Navy's military personnel and operations and
maintenance budget justification books. Within the operations and
maintenance justification books, we reviewed the budgets of the defense
health program; the defense commissary agency; the morale, welfare and
recreation activities (OP-34 exhibit); and DOD dependent education
activity. In addition, we reviewed and compiled data from the future years
defense planning document. We also reviewed and compiled data from the VA
benefits and health care budget justification books. We used deflators to
adjust the budget appropriations into current fiscal year 2004 dollars.

Appendix I Scope and Methodology

To estimate the total federal tax expenditure that results from the
taxexempt housing and subsistence allowances military personnel receive,
we grouped servicemembers by earnings, allowances, and tax status for the
years 2000 to 2004 and used the National Bureau of Economic Research's
TAXSIM Model to simulate tax liabilities under different scenarios.1 Only
military income was considered. Nonmilitary income, such as spousal
earnings or investment income, would likely increase marginal tax rates
and, thus, increase our tax expenditure estimates.2 A servicemember's
earnings and tax status were determined by rank, years of service, and
number of dependents.3 Allowances are determined by rank and number of
dependents, and we assumed servicemembers living on-base received the
average housing allowance of similar servicemembers living off-base. The
number of servicemembers in each group for each year was provided by the
DOD's Selected Military Compensation Tables. The tax expenditure for each
group is estimated as the number of servicemembers in the group multiplied
by the difference in the tax liabilities of a representative member of the
group assuming that the allowances are and are not taxable.

1 NBER's TAXSIM Model simulates the U.S. federal income tax rules. See
Daniel Feenberg and Elisabeth Coutts, "An Introduction to the TAXSIM
Model," Journal of Policy Analysis and Management, Volume 12, No. 1, 1993
pp. 189-194.

2 In the case where servicemembers are eligible for the Earned Income Tax
Credits (EITC), any extra income would likely result in a lower marginal
tax rate, because of the structure of the EITC phase-out.

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

Appendix I Scope and Methodology

To estimate health care accrual costs, we used official estimates of
accrual health care costs for all retirees and their dependents provided
by DOD's Office of the Actuary. Since 2003, health care costs for retirees
over 65 years of age and their dependents are accrual-budgeted in the DOD
Military Personnel budget. However, health care costs for retirees under
65 years of age and their dependents are budgeted through an annual
appropriation to the Defense Health Program (DHP). Because the DHP annual
budget includes health care costs for active duty servicemembers and their
dependents as well as retirees under 65 and their families, we had to
estimate the share of DHP costs associated with active duty servicemembers
and their dependents for the fiscal years 2000-2004. Using similar
methodology employed by the Congressional Budget Office, we transformed
DHP enrollee data (broken out by gender, age category,4 and whether they
were active duty personnel, family of active duty personnel, retirees
under 65, or family of retirees under 65) into equivalent demand units,
because enrollees do not all have the same underlying demand for health
care services-average health care expenditures and reliance upon DHP
differ across the groups.5 The estimated share of DHP dollars due to
active duty service is the ratio of equivalent demand units for active
duty personnel and their families to the total number of equivalent demand
units in DHP. We first used the Medical Expenditures Panel Survey (MEPS)
to estimate the average total health care expenditures each year
(2000-2004) by gender and age category.6 Estimates of relative use were
derived by dividing all estimates by the average total health care
expenditures for males ages 18 to 44 (the comparison group). Second,
reliance rates for DHP were provided by the DOD from the annual Military
Health Care Survey for active duty personnel, their families, and retirees
under 65 and their families.

To calculate the costs of future veterans' benefits for current active
duty servicemembers, including the costs for health care, compensation,
pension, and other types of benefits, we used notional costs as a
percentage of basic pay of accruing and actuarially funding VA benefits in

4 The age categories used are: 0 to 17 years old, 18 to 44 years old, 45
to 64 years old, and over age 65.

5 See Congressional Budget Office, "Growth in Medical Spending by the
Department of Defense," appendix B (2003) for a more extensive discussion
of this methodology.

6 The 2002 estimates are used for 2003 and 2004, because MEPS data for
those years have not been released. There is no apparent trend in the
relative use data and using an average over previous years did not affect
the results.

                        Appendix I Scope and Methodology

the DOD budget. The notional cost percentages we used were unofficial
Office of Management and Budget estimates. These estimates were based on
the most recent official percentages shown in table 12-2 of the 1999
President's Budget.

Determination of Active Duty Servicemembers' Perceptions of Their
Compensation

Focus Groups

Scope of Our Focus Groups

To determine servicemembers' satisfaction and dissatisfaction with
components of their compensation, we reviewed past DOD surveys, including
the 2002, 2003, and 2004 Status of Forces Surveys. The 2002 survey
administered to over 30,000 servicemembers had a response rate of 32
percent. DOD has conducted and reported on research to assess the impact
of nonresponse rate on overall estimates. It found that, among other
characteristics, junior enlisted personnel (in pay grades E1 to E4),
servicemembers who do not have a college degree, and members in services
other than the Air Force were more likely to be nonrespondents. We have no
reason to believe that potential nonresponse bias not otherwise accounted
for by DOD's research is substantial for the variables we studied in this
report. Therefore, we concluded the data to be sufficiently reliable for
the purposes of this report. To determine active duty servicemembers'
perceptions of their compensation, we conducted 40 focus groups at eight
military installations across all four services. We gathered supplemental
information from focus group participants through a survey that asked
questions to assess knowledge, individual opinions, and attitudes toward
compensation.

We conducted 10 focus groups with active duty servicemembers in each of
the four services, for a total of 40 focus groups. Focus groups involve
structured small group discussions designed to gain in-depth information
about specific issues that cannot easily be obtained from single or serial
interviews. As with typical focus group data collection, our design
involved multiple groups with certain homogeneous factors-such as rank,
service, and installation. Each group was designed to involve 8 to 12
participants. Discussions were held in a structured manner, guided by a
moderator who used a standardized list of questions. Our overall objective
in using a focus group approach was to obtain servicemembers' views,
insights, and feelings about military compensation.

To ensure we achieved saturation, the point where we were no longer
hearing new information, we conducted 40 focus groups with multiple active
duty servicemembers at eight military installations (see table 4). This
design allowed us to identify differences in perceptions of servicemembers

                        Appendix I Scope and Methodology

in different branches of the military and in different pay grades. In all
focus groups, in order to hear from different perspectives, efforts were
made to select participants with differences in sex, marital status, if
the member lived on base or off base, and if the member had been recently
deployed. Focus groups were conducted from November 2004 to March 2005.

                      Table 3: Composition of Focus Groups

Servicemember pay grade

                                Enlisted Officer

     Service            Location          E1-E4 E5-E6 E7-E9 O1-O3 O4-O6 Total 
    Air Force     Pope Air Force Base,                                  
                          North                                         
                        Carolina              1     1     1     1     1 
                  Scott Air Force Base,       1     1     1     1     1 
                        Illinois                                        
       Army       Ft. Benning, Georgia        1     1     1     1     1 
                    Ft. Bliss, Texas          1     1     1     1     1 
       Navy     Naval Station Norfolk,        1     1     1     1     1 
                Virginia                                                
                 Navy Region Southwest,                                 
                       California             1     1     1     1     1 
Marine Corps      Camp Pendleton,          1     1     1     1     1 
                       California                                       
                Camp Lejeune, North           1     1     1     1     1 
                Carolina                                                
      Total                                   8     8     8     8     8 

Source: GAO analysis.

Methodology of Our Focus A guide was developed to assist the moderator in
leading the discussions.

Groups	The guide helped the moderator address several topics related to
servicemembers' perceptions of their compensation including their
definition of compensation, sources of information on compensation,
satisfaction and dissatisfaction with compensation, and any needed changes
to compensation. Each focus group started with the moderator describing
the purpose of the study and explaining how focus groups work.
Participants were assured that all their comments would be anonymous in
that their names would not be used in write-ups of the sessions or in the
report. The participants were then asked open-ended questions about their
perceptions of military compensation. All focus groups were moderated by a
GAO analyst, while at least one GAO analyst observed and took notes. After
each focus group the moderator and note taker reviewed the transcript
together to verify that all comments were captured.

                        Appendix I Scope and Methodology

Content Analysis	We performed a systematic content analysis of discussions
to categorize and summarize participants' perceptions of their
compensation. Using the primary topics covered in the focus group guide,
GAO analysts reviewed responses from several of the focus groups and
created a list of subcategories within each of the primary focus group
topics. A GAO analyst then reviewed the responses from each focus group
and assigned each comment to a corresponding category. To ensure
inter-rater reliability, another analyst also reviewed each comment and
independently assigned it to a corresponding category. Any comments that
were not assigned to the same category were then reconciled and
adjudicated by the two analysts, which led to the comments being placed
into one or more of the resulting categories. Agreement regarding each
placement was reached between at least two analysts. The responses in each
category were then used in our evaluation of how servicemembers perceive
their compensation.

Limitations	Methodologically, focus groups are not designed to (1)
demonstrate the extent of a problem or to generalize results to a larger
population, (2) develop a consensus to arrive at an agreed-upon plan or
make decisions about what actions to take, or (3) provide statistically
representative samples or reliable quantitative estimates. Instead, focus
groups are intended to provide in-depth information about participants'
reasons for the attitudes held toward specific topics and to offer
insights into the range of concerns and support for an issue.

The projectability of the information produced by our focus groups is
limited for several reasons. First, they represent the responses of only
the active duty servicemembers in our 40 focus groups. The experiences of
other active duty servicemembers who did not participate in our focus
groups may have varied. Second, while the composition of the groups was
designed to assure a distribution of active duty servicemembers by several
characteristics, including sex and marital status, the groups were not
randomly sampled.

Despite these limitations, we gathered data from a broad range of
servicemembers at several strata of the military hierarchy and obtained a
better understanding of how servicemembers perceive their compensation and
where they obtain information about their pay and benefits. We were also
able to obtain information complementary to the Status of Forces Survey,
which seeks information on satisfaction and dissatisfaction among military
servicemembers but does not address reasons for these perceptions.

                        Appendix I Scope and Methodology

Use of a Survey to Supplement Focus Group Findings

We conducted a survey of focus group participants to provide further
information on servicemembers' perceptions of their compensation. The
survey was administered and received from the universe of focus group
participants, which numbered 401. The survey collected additional specific
information on servicemembers' satisfaction and dissatisfaction with their
pay and benefits, sources of information on their compensation,
recommendations for changing compensation, and demographic information.

Since the survey was used to collect supplemental information and
administered to focus group participants only, the results cannot be
generalized across the population of active duty servicemembers. The
results from this data collection effort represent only those who
participated in our focus groups.

The objectives of our survey were to collect (1) data that could not
easily be obtained through focus groups and (2) collect some of the same
data found in past DOD surveys.

The practical difficulties of conducting any survey may introduce certain
types of errors, commonly referred to as nonsampling errors. For example,
differences in how a particular question is interpreted, the sources of
information available to respondents, or the types of people who do not
respond can introduce unwanted variability into survey results. To reduce
nonsampling errors, we conducted five pretests with active duty
servicemembers, both enlisted and officers, and revised it based on the
pretest results. We also performed statistical analyses to identify
inconsistencies and had a second independent reviewer for the data
analysis to further minimize such error. The surveys were administered in
person directly after each focus group session.

To analyze survey results, we ran frequencies for all questions and
highlighted those where a significant response occurred in a particular
category. We also compared responses by pay grade and service.

We conducted our review from August 2004 through May 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Sample of a Personal Statement of Military Compensation

PERSONAL STATEMENT OF MILITARY COMPENSATION

This statement is intended to outline the total value of your military
pay, allowances and benefits. By making your compensation more "visible,"
this statement could be useful when applying for credit or loans
(including home loans) from businesses or lending institutions. Another
possible use of this summary is to help determine whether specific
civilian employment offers would let you maintain the same standard of
living you had while serving in the military. Start with the Total Direct
Compensation on page 1, add the Federal Tax advantage from page 2, and
then add any additional expense a civilian employer would expect you to
pay for health and life insurance, retirement contributions, etc. This
will tell you approximately what level of civilian salary you must earn in
order to maintain a similar standard of living as that provided by your
military take home pay. Each section of this statement contains an
explanation. However, if you have any questions, please contact your local
pay office.

SUMMARY: 	A. Basic Military Compensation as of March
2005....................................................................$
B. Special Pay and Bonuses
.......................................................................................................$

C. 	Expense allowances
...............................................................................................................$
TOTAL DIRECT COMPENSATION
........................................................................$______________

Added value of indirect compensation
.......................................................................................$
Added considerations/programs (Your estimate)
........................................................................$______________
TOTAL COMPENSATION
.......................................................................................$______________

The following information provides more details on the value of your
personal compensation. Adding the indirect compensation and additional
considerations to your direct compensation should provide a clearer
picture of your total military compensation package.

DIRECT COMPENSATION AS OF MARCH 2005 (NOTE 1)

A. BASIC COMPENSATION. Describes the basic elements of compensation paid
to all military members. It includes Basic Pay, the value of living in
government quarters or Basic Allowance for Housing (BAH), and the value of
meals furnished or Basic Allowance for Subsistence (BAS). Your basic
compensation is:

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

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

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

Special and Incentive Pays
.....................................................................................................................................$
$ Bonuses
..................................................................................................................................................................$
$ TOTAL SPECIAL PAY AND BONUSES
...............................................................................................$_______
$_______

C. EXPENSE ALLOWANCE. You may receive allowances to help compensate you
for extra expenses you incur based on the location of your duty
assignment. These include the overseas housing allowance (OHA), cost of
living allowance (COLA) (Note 1) only payable in certain areas, family
separation allowance (FSA), and clothing replacement allowance (CRA). Your
total expense allowances are:

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

Note 1: Pay items on your March 2005 LES, marital status and dependents
taken from your personnel records. Annual rates for COLA are for 365 days,
not 12 times the March rate. Note 2: If BAH was not in effect in March
2005, we assumed you received quarters or meals worth about as much as
BAH. If you received partial BAH, we assumed that the partial BAH and
value of quarters together roughly equal full BAH.

                             INDIRECT COMPENSATION

Other programs supplement your direct compensation. These have a cash
value to you in terms of spendable income. They are an important part of
your compensation and should be considered in adding up your real pay
value.

A. MEDICAL CARE. As an active duty member, the military provides you and
your family with comprehensive medical care. TRICARE is the name of the
Defense Department's regional health care program. Under TRICARE, there
are three health plan options: TRICARE Prime (all active duty are
automatically in Prime, but family members may choose to enroll in this
HMO-type plan); TRICARE Standard (an indemnity plan, formerly called
CHAMPUS); TRICARE Extra (a Preferred Provider Organization plan). Under
TRICARE Prime, you will have an assigned military or civilian primary care
manager who will manage all aspects of your care, including referrals to
specialists. Prime has no deductibles, cost-shares, or co-payments except
a nominal co-payment for prescriptions filled at a retail pharmacy or
through the National Mail Order Pharmacy program. TRICARE Standard offers
more choice of providers, but requires an annual $150 deductible/person or
$300/family (E-1 to E-4: $50/person, $100/family) plus a 20% cost-share
for outpatient care and an $13.90/day charge for inpatient care. TRICARE
Extra offers the same benefit as Standard, but when you elect to use a
Prime network provider, the outpatient visit cost-share is only 15%. The
average total premium of a civilian plan that would provide similar
benefits to TRICARE Prime is conservatively estimated at
$374.27/month/individual, $ 4,491.24/year/individual,
$1,022.03/month/family and $ 12,264.36/year/family - these premiums do not
take into consideration cost-shares and deductibles often required in
civilian plans like the TRICARE Standard and Extra options. Please contact
the Beneficiary Counseling and Assistance Coordinator at the nearest
military treatment facility for additional information. The personal costs
experienced by you or your family will vary depending on the TRICARE
option you select.

Appendix II
Sample of a Personal Statement of Military
Compensation

                                                           Eligible                                                                                                                            
                                                           (as                                                                             
                           Plan                            determined                 Retired Pay Formula (Notes 2, 3 & 4)                 Cost-of-Living Adjustment (COLA) (Note 5)
                                                           by DIEUS)                                                                       
                                                           (Note 1)                                                                        
                                                           Entered                                                                                                                             
                                           Final Basic Pay service                   2.5% times the years of service times final basic pay                                                     
                                                           prior to 8                                                                      Full inflation protection; COLA based on Consumer
                                                           Sep 80                                                                          Price Index (CPI)
                                                           Entered                                                                                                                             
                                                           service on                                                                                                                          
                                           High-3 (Note 6) or after 8  2.5% times the years of service times the average of the highest 36 Full inflation protection; COLA based on Consumer
                                                           Sep 80 and                                                  months of basic pay Price Index (CPI)
                                                           before 1                                                                        
                                                           Aug 86                                                                          
                                                                      High-3: 2.5% times the years of service times the average of the     High-3: Full inflation protection; COLA based on    
High-3 Choice                                                         highest 36 months of basic pay                                       Consumer Price Index (CPI)                          
ORRedux/CSB    Entered OR*Redux/CSB OR*Redux/CSB 
Choice: Instead of retiring under High-3, members may      service on option: 2.5% times the years of service, minus one percentage point  option: Partial inflation protection; COLA based on 
choose to receive a $30,000 (Note 7) "Career Status Bonus" or after 1 from the product for each year less than 30 years, times the average Consumer Price Index (CPI) minus 1 percent. At age  
at 15 years of service in exchange for agreeing to serve       Aug 86 of the highest 36 months of basic pay. At age 62, retired pay is     62, retired pay is adjusted to reflect full COLA    
to at least 20 years of service and then retiring under               recalculated without deducting the one percentage point for each     since retirement. Partial COLA then resumes after   
the less generous Redux plan.                                         year less than 30, which allows it to catch up to what it would have age 62.                                             
                                                                      been without the Redux penalty.                                      

Appendix II
Sample of a Personal Statement of Military
Compensation

                           ADDITIONAL CONSIDERATIONS

When adding up the total worth of your compensation package, you should
also consider the many other programs and privileges you have. Their worth
will be different for each person depending on use. This page is presented
for you to determine the yearly value/savings you estimate each of these
programs has been worth to you.

Your Estimate of Annual

Value/Savings

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

STATE/LOCAL TAX ADVANTAGE. Besides being exempt from Federal taxes, your
BAH, BAS, and overseas allowances and in-kind housing may be exempt from
State and Local taxes, depending upon the state you claim as a legal
residence. Relative to the tax laws of your legal residence, this can save
you hundreds of dollars each year.

$ ____________

COMMISSARY. Studies have found that commissary shoppers save an average of
30% or more on their grocery purchases, amounting to about $2,700 annually
for a family of four. If you spend the following, your savings will be
approximately: $ ____________

Monthly Grocery Purchases

Supermarket Commissary Savings % Savings

$200.00 $140.00 $60.00 30%

$300.00 $210.00 $90.00 30%

$400.00 $280.00 $120.00 30%

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

ARMY AND AIR FORCE EXCHANGE SERVICE (AAFES). Now in our second century of
service, the Army and Air Force Exchange Service (AAFES) remains committed
to serving you, the "best customer in the world". Your exchanges provide
products and services to authorized customers worldwide and generate
reasonable earnings to supplement appropriated funds for Army and Air
Force morale, welfare, and recreation (MWR) programs. Earnings fund new
and improved stores with most of the profits going to MWR programs - over
$2 30 million last year. AAFES' shelf prices provide you 21.9 percent
overall savings compared to off post/base retail operations. While you can
enjoy your exchange benefit in many ways the greatest value is AAFES'
pledge to "Go Where You Go." And remember, AAFES offers 24/7 convenience
through its website 'www.aafes.com'.

SURVIVOR BENEFIT PLAN (SBP). All pay stops when a member dies. However, if
you die on active duty, your surviving spouse and children are
automatically protected by the SBP--at no cost to you. The surviving
spouse will get an annuity equal to the difference between the dependency
and indemnity compensation DIC payment and the SBP payment that would be
paid if you had been retired on the date of your death. To determine the
amount of the SBP, the maximum applicable rate of retired pay that would
be due you will be used. The only way retirees can guarantee their
survivors receive a share of their retired pay is to enroll in SBP before
they retire. The maximum annuity is equal to 55% of retired pay until the
spouse attains age 62. At age 62, the annuity is reduced to 35% of retired
pay unless the retiree purchases the Supplemental Survivor Benefit Plan
(SSBP), which restores the annuity to between 40 and 55%, depending on the
amount selected. The FY05 NDAA eliminated the reduction of SBP at age 62,
with phase-in rates of 40% in 2005, 45% in 2006, 50% in 2007, and 55% in
2008. The SBP annuity for your survivor is adjusted each year by the same
percentage increase given to military retired pay. Additional information
can be found at http://www.afpc.randolph.af.mil/

$____________

UNIFORMED SERVICE THRIFT SAVINGS PLAN (TSP): You can gain additional tax
deferred advantages through participation in the TSP. You are limited in
the amount of Base Pay you may contribute (below), however you may
contribute up to 100% of your special, incentive, or bonus pay. There are
also annual contribution limits that apply (below). If you perform duty in
a designated combat zone, your contributions to TSP will be tax-exempt
(versus tax deferred) and will not count against your tax deferred limits.
The combination of your tax-exempt and tax deferred contributions are
limited to $40,000 for any year. More information can be found at
http://www.tsp.gov/ 

Year % of Base Pay Total Annual Tax Deferred Limits

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

2005 10 $14,000

2006 + (unlimited) $15,000 $ ____________

FEDERAL LONG-TERM CARE INSURANCE PROGRAM (FLTCIP): The FLTCIP is the only
long term care insurance program sponsored by the Federal Government. It
is managed by the Office of Personnel Management and offered by two
insurance leaders--John Hancock and MetLife. It provides comprehensive
benefits to included home care, informal care, and inflation options at
competitive group premiums. The

Appendix II
Sample of a Personal Statement of Military
Compensation

FLTCIP helps preserve your retirement savings should a long-term care need
arise. Those eligible for the FLTCIP include all Federal Employees
(Uniformed Service members), their spouses, adult children (including
natural, adopted & step), parents, parents-in-law, and stepparents.
Call 1-800-LTC-FEDS (1-800-582-3337) or visit the web site at:
http://www.LTCFEDS.com $ ____________

EDUCATION PROGRAMS. Members in authorized off-duty education programs
receive up to 100 percent of tuition costs, up to a maximum of $250.00 per
credit hour, $4,500 per fiscal year, paid by the Government. Members who
had established an account in the Veterans Educational Assistance Program
(VEAP) by contributing $25-$100 each month or by lump sum payment (up to
$2700), have a Government $2 for $1 matching contribution for a total of
up to $8,100. Members who elected to participate in the Montgomery GI Bill
upon entering active duty (after 30 June 1985), and agreed to payroll
reduction of $100 per month for a total of 12 months, can receive a
benefit of $ $36,144 with yearly increases as determined by the consumer
price index. $____________

SERVICES ACTIVITIES. Provide conveniently located, low-cost,
professionally managed activities and entertainment. You and your family
members receive significant savings when you participate in Services
programs such as fitness, libraries, child development and youth programs,
skills development, golf, bowling, clubs, outdoor recreation activities,
equipment checkout, aero clubs, etc. $____________

COUNSELING AND ASSISTANCE PROGRAMS. Military members can get free personal
financial management counseling, relocation services assistance,
transition counseling, spousal employment assistance, and assistance from
a wide range of other programs available from Air Force Family Support
Centers. Air Force Aid Society provides zero interest emergency loans and
grants to members who qualify (total loans and grants given in 2004 was
$11,300,000 and 10,000,000 in community outreach and education programs).
$ ____________

LEGAL COUNSELING. Military members can get free legal counseling and
assistance. $_____________ Consultations with an attorney: $150.00 Wills:
$200.00 Notaries: $5.00 Advance Medical Directives: $75.00 Client
Correspondence: $50.00 Powers of Attorney: $50.00

SPACE AVAILABLE TRAVEL. Space available travel for Uniformed Services
members can provide substantial savings over commercial airline fares.
Space available travel is defined by DoD policy as a privilege (not an
entitlement), which accrues to Uniformed Services members as an avenue of
respite from the rigors of Uniformed Services duty. Under one of the
categories of space available travel, members on leave can travel with one
dependent on permissive TDY house hunting trips. For additional
information on this special privilege, consult the AMC Space Available web
page at http://public.amc.af.mil/Library/SPACEA/spacea.htm

$ ____________

TRICARE DENTAL PROGRAM (TDP). TDP eligibility includes spouses and
eligible children of active duty members of the Uniformed Services,
Selected Reserve and Individual Ready Reserve. Additionally, the Selected
Reserve and Individual Ready Reserve members themselves are eligible for
the TDP. Enrollees may be treated in both CONUS and OCONUS locations. TDP
monthly premiums for Selected Reserve members and family members of active
duty are cost-shared by the Department of Defense (DoD) (i.e., the
government pays 60% of the premium, sponsor pays 40%). The sponsor's
monthly premium payment is $9.32 for a single enrolled family member and
$23.31 for families with two or more members enrolled. This equates to an
annual savings conservatively estimated at $175 for single and $439 for
family enrollments. Basic preventive, diagnostic and emergency services
are covered at 100%; the plan pays 50%-80% of the cost for certain
specialized services such as restorations, orthodontics, and
prosthodontics. Moreover, DoD cost-shares other specialty care
(periodontic, endodontic, and oral surgery) at a higher percentage for
E-1s to E-4s.

$ _____________

(add this amount to Summary Total on page 1) TOTAL $ _____________

                                  Appendix III

                    Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix III
Comments from the Department of Defense

Appendix IV

                     GAO Contact and Staff Acknowledgments

GAO Contact Derek Stewart, (202) 512-5559 ([email protected])

Acknowledgments	Lori Atkinson, Alissa Czyz, Natasha Ewing, Alison Martin,
David Mayfield, Lindsey Mosson, James Pearce, John Pendleton, Charles
Perdue, Terry Richardson, Samuel Scrutchins, and Sonja Ware made key
contributions to this report.

Related GAO Products

Defense Management: Key Elements Needed to Successfully Transform DOD
Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005.

Military Personnel: Preliminary Observations on Recruiting and Retention
Issues within the U.S. Armed Forces. GAO-05-419T. Washington, D.C.: March
16, 2005.

21st Century Challenges: Reexamining the Base of the Federal Government.
GAO-05-325SP. Washington, D.C.: February 2005.

Military Personnel: DOD Needs More Data Before It Can Determine if Costly
Changes to the Reserve Retirement System Are Warranted. GAO-04-1005.
Washington, D.C.: September 15, 2004.

Military Personnel: Survivor Benefits for Servicemembers and Federal,
State, and City Government Employees. GAO-04-814. Washington, D.C.: July
15, 2004.

Military Personnel: DOD Has Not Implemented the High Deployment Allowance
That Could Compensate Servicemembers Deployed Frequently for Short
Periods. GAO-04-805. Washington, D.C.: June 25, 2004.

Military Personnel: Active Duty Compensation and Its Tax Treatment.

GAO-04-721R. Washington, D.C.: May 7, 2004.

Military Personnel: Observations Related to Reserve Compensation,
Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops.

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

Military Personnel: Bankruptcy Filings among Active Duty Service Members.
GAO-04-465R. Washington, D.C.: February 27, 2004.

Military Personnel: DOD Needs More Effective Controls to Better Assess the
Progress of the Selective Reenlistment Bonus Program. GAO-04-86.
Washington, D.C.: November 13, 2003.

Military Personnel: DOD Needs to Assess Certain Factors in Determining
Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions.
GAO-03-554. Washington, D.C.: April 29, 2003.

Military and Veterans' Benefits: Observations on the Concurrent Receipt of
Military Retirement and VA Disability Compensation. GAO-03-575T.
Washington, D.C.: March 27, 2003.

Military Personnel: Management and Oversight of Selective Reenlistment
Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: November
25, 2002.

Military Personnel: Active Duty Benefits Reflect Changing Demographics,
but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.:
September 18, 2002.

Military Personnel: Higher Allowances Should Increase Use of Civilian
Housing, but Not Retention. GAO-01-684. Washington, D.C.: May 31, 2001.

Defense Health Care: Observations on Proposed Benefit Expansion and
Overcoming TRICARE Obstacles. GAO/T-HEHS/NSIAD-00-129. Washington, D.C.:
March 15, 2000.

Military Personnel: Preliminary Results of DOD's 1999 Survey of Active
Duty Members. GAO/T-NSIAD-00-110. Washington, D.C.: March 8, 2000.

The Congress Should Act to Establish Military Compensation Principles.

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

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