The second notable trend is that after each cycle the budget returns to a floor,and that floor is gradually rising over time. At the end of WWII, defense spending plummeted to less than $100 billion in today’s dollars. After the Korean War, the defense budget dropped again, but only to about $290 billion, this time due, in part, to the emergence of a peacetime defense industry. Following the Vietnam War, defense spending fell again to about $300 billion. After the end of the Cold War buildup, the defense budget never dropped below $350 billion. These two trends suggest that if the current cycle were to follow the same pattern—and there are reasons to think it may not—the defense budget could experience a significant decline over the coming decade. While such cycles are understandable given the ever-changing threat environment the nation faces, sharp rises and declines in the defense budget complicate long-term defense planning.
Just as the topline of the defense budget has varied over time, the way in which money is allocated within the defense budget has also varied. In recent years, funding has shifted away from acquisition accounts toward operation and maintenance and military personnel accounts. At the previous peak in defense spending in FY 1985, the operations and maintenance and military personnel accounts garnered 51 percent of the total DoD budget versus 45 percent for acquisition. In the FY 2011 budget request, 67 percent is allocated for operations and maintenance and military personnel, compared to 30 percent for acquisition—or 62 percent and 34 percent, respectively, if war funding is excluded.
The rapid growth in personnel costs is of particular concern because the total number of personnel has not varied significantly over the past decade. Since 2001, the military personnel budget has grown by a total of 46 percent, adjusting for inflation and not including war funding, to $139 billion in the FY 2011 request. What is not included in that figure is the Defense Health Program, which is funded under the operations and maintenance title of the budget at $30 billion. Also not included is the cost of DoD civilian personnel, which adds another $77 billion. In total, DoD spends some $246 billion on uniformed military and DoD civilian personnel—not including the cost of contractors. With a payroll of 2.3 million direct employees, DoD makes up 51 percent of the federal workforce and employs more Americans than Wal-Mart and the U.S. Postal Service combined.
A notable trend in military personnel funding is the growing portion of military compensation that is consumed by noncash and deferred benefits. For comparison, in the private sector about 29 percent of total compensation costs go to non-cash and deferred benefits,such as healthcare and pensions. At General Motors, before it went into bankruptcy, noncash and deferred compensation made up 45 percent of total compensation costs. For DoD, the figure is 52 percent. Military healthcare is a major contributor to noncash and deferred compensation costs for DoD, due in part to more and more military retirees and their dependents electing to use their military healthcare benefit. A total of 9.5 million Americans are now eligible beneficiaries in the military healthcare system, including the active-duty military, military retirees, and their dependents, at a cost to DoD of $50.7 billion in the FY 2011 budget request.
The fee charged to military retirees for enrollment in TRICARE was set in 1995 at $460 for a family plan and has not increased since then. For comparison, the average annual premium paid by private-sector workers is $3500—not including the share of annual premiums paid by their employers. About 70 percent of military retirees have access to private-sector insurance, but because of this growing price differential more of them are choosing to stay in the military system. Another factor in the rising cost of military healthcare is the TRICARE for Life program, a Medicare supplemental insurance program for military retirees over the age of 65 that was enacted in 2001. Accrual payments to this trust fund now total $11 billion annually.