The National Guard Strategic reserve: a member of the U.S. National Guard training in Georgia, April 2013.

Accepting Austerity

The Right Way to Cut Defense

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On March 1, 2013, the U.S. Department of Defense lost $37 billion overnight to sequestration. The cut marked the first wave of a series of planned cutbacks that will shrink future budgets across the federal government by about $1 trillion over nine years. The reductions had been set in motion back in 2011, when a special “super committee” established by the Budget Control Act (BCA) failed to reach a deficit-reduction agreement, triggering automatic cuts designed to punish both parties. Unlike other budget cuts, sequestration is implemented across the board, taking the same percentage bite out of every account. Except for the decision to spare the military personnel account that provides the pay for the United States’ men and women in uniform, defense leaders had no choice about where to take the 2013 cuts. And so, with just seven months left in the fiscal year, sequestration abruptly erased about eight percent of the the Pentagon’s budget for the year.

Not surprisingly, sequestration has infuriated defense officials. On August 1, 2013, with the start of the 2014 fiscal year just two months away, Ashton Carter, the deputy secretary of defense, and James Winnefeld, the vice chairman of the Joint Chiefs of Staff, testified that another year of sequestration would bring chaos, waste, and lasting disruption.

It didn’t have to be this way. President Barack Obama signed the BCA in August 2011. By the end of the year, the super committee established to craft a fiscal bargain that would replace the nine-year automatic budget cuts embedded in the bill had crashed and burned, triggering the nine-year budget cuts that began with the March 2013 sequestration. So the White House and the Department of Defense have had two years to develop a national security strategy consistent with the new budget limits, design forces and programs to match that strategy, point the Pentagon down a somewhat less abrupt budgetary glide path, and institute measures to smooth the downsizing. Instead of doing any of these things, the Obama administration and the Department of Defense have played a protracted game of chicken with Congress. All that time was wasted.

What’s worse, officials seem to have learned nothing from their failures. Instead of crafting their own coherent plan to absorb the required cuts, they will again sit by and let the arbitrary sequestration machine make their decisions for them. For 2014, the BCA requires a reduced defense budget, but it allows policymakers to choose what to cut; it does not demand that every defense account be cut by the same percentage through sequestration. Rather, it calls for sequestering only the part of the appropriated defense budget that exceeds the BCA’s cap. If the Pentagon had submitted a budget consistent with that limit, and if Congress had appropriated that amount, there would be no sequestration for 2014. But defense officials chose not to comply with the cap, and Congress, as of September 2013, looks poised to appropriate more than its own budget-control law allows. If that happens, the Pentagon will be in for a second round of mechanical cuts.

Still, defense leaders naively dream that the president and Congress can find an alternative. In the summer of 2013, the Pentagon finally unveiled the findings of its Strategic Choices and Management Review (SCMR), which considered how it might deal with a smaller budget. But as Carter’s accompanying testimony revealed, the department, rather than embrace a smaller budget, continues to act as though it can avert the cuts entirely, or at least delay them, if it just explains how disruptive they will be. “We hope we will never have to make the most difficult choices that would be required if the sequestration-level budgetary caps persist,” Carter said. “Strategic cuts are only possible if they are ‘back-loaded,’” he added -- in other words, put off for years.

But the BCA is not going away. Cutting defense may be nobody’s first choice for dealing with the government’s fiscal problems, but it is also no politician’s last choice. As much as Republicans hate military cuts, they hate raising taxes even more. And as much as Democrats don’t want to look stingy with security, they are even more afraid to skimp on Social Security or Medicare. Moreover, the political costs of keeping the BCA in place are low: since the law is already on the books, no politician has to vote again for the cuts.

Add fiscal considerations to those political realities, and the chances of turning back the clock on the BCA look even slimmer: with the exception of a few years during and after World War II, U.S. federal debt now composes a larger share of the economy than ever before. Given that reality, even if the law were ultimately overturned, any grand bargain between Republicans and Democrats would surely include defense cuts at least as large as those the Pentagon now faces.

American defense planners therefore need to accept the obvious: budget cuts are here to stay. The time to plan for cutbacks and start reshaping the military was two years ago, when the writing was already on the wall. Since that never happened, the government must catch up fast. Congress, for its part, should allow the Pentagon to control its mounting personnel costs. The Pentagon and the White House, meanwhile, should come up with a national security strategy that the country can actually afford, reshaping U.S. forces to reflect that strategy and preserve the best military in the world.

PERSONNEL DEVELOPMENT

For the 2014 fiscal year, the BCA reduces the nonwar defense budget by about ten percent compared with the plan the president submitted to Congress in April 2013 -- returning it, in real terms, close to its 2007 level and holding it about there until 2021. But the Pentagon cannot buy the forces it had in 2007 with the budget it had in 2007, because several categories of spending are growing faster than inflation. Prominent among these are military health care and military and civilian pay -- massive costs that the government must start getting under control now.

Between 1998 and 2013, military pay rose by more than 60 percent in real terms. The pay of the nearly 800,000 civilian workers employed by the Department of Defense rose by nearly as much. During that same period, the costs of health care for military personnel and retirees and their families and survivors more than doubled in real terms. Absent policy changes, those costs will continue to outstrip inflation by wide margins over the coming decade. Pay and medical costs will take increasingly big bites out of military capability.

Initially, the Pentagon supported the rise in pay as a way to improve recruiting and retention, which it had difficulty with in the late 1990s. The military also worried that its raises had underperformed the private sector’s for about 15 years. Consistent with those concerns, Congress required that annual pay raises for military personnel and federal civilian employees exceed wage growth in the private sector until 2006.

By 2007, annual increases in pay and allowances had more than made up for the relatively lower raises of earlier years, and the Pentagon began asking Congress for more modest annual raises. Under pressure from military and veterans’ associations and fearful of stinting the military in a time of war, however, Congress persistently added more than the department requested. The result is that today’s military officers take more home in their paychecks than eight out of ten college-educated civilians. In terms of their income, enlisted members most resemble the 90th percentile of civilians with comparable levels of education and experience.

The Pentagon’s medical costs are also on the rise, and not just because the underlying costs of health care in the United States have grown. The Pentagon adopted its current health plan, called Tricare, in the mid-1990s. It set the fees that retirees would pay to use the system yet made no provisions for adjusting those fees as medical costs rose. As a result, the share of health-care costs borne by military retirees using the plan dropped over the years, even as the premiums and copays they would have paid through their post-military employers skyrocketed. The
upshot is that most military retirees now choose Tricare, and the costs to the government show it.

Since 2006, the Defense Department has asked repeatedly for permission to raise health insurance fees on military retirees. Changing the cost-sharing arrangement would of course help defray the government’s costs, but more important, it would also make the government’s insurance plan less attractive to retirees who have other good health coverage options. Yet Congress, under the same pressure it has faced about pay, has turned down all but the tiniest rise in fees.

The SCMR suggested new mechanisms to get military retirees to use private-sector insurance if it is available to them, and changes like this make a lot of sense. After 15 years of expansion in their pay and benefits, service members, civilian Defense Department employees, and military retirees are financially well rewarded for their dedication and sacrifice. Moreover, with the war in Afghanistan drawing to a close and jobless rates still above seven percent in the private sector, recruiting and retention remain strong.

As long as defense budgets overall kept growing year after year, it was easy for Congress to turn down the Pentagon’s requests to tap the brakes on pay and benefits. Now, however, with wars ending and budgets shrinking so abruptly, lawmakers might finally agree to the department’s recommendations. Doing so would save an average of tens of billions of dollars each year over the coming decade, enough to spare three army brigades, 30 navy ships, and four air force squadrons from the chopping block.

SELECTING A STRATEGY

The White House and the Pentagon, meanwhile, need to deal with the inevitable cuts by formulating a strategy consistent with the resources the BCA provides. They last outlined a formal Defense Strategic Guidance in January 2012, which called for less emphasis on long-running stability and counterinsurgency operations in favor of greater attention to the Asia-Pacific region. Although the document laid out a somewhat less expansive global posture than had previous post–Cold War versions, it still called on the U.S. armed forces to underwrite a rules-based international order, “confront and defeat aggression anywhere in the world,” and broaden already extensive military partnerships with other countries. But that strategy, as Secretary of Defense Chuck Hagel has admitted, is unaffordable under the BCA’s funding levels.

What strategy does prove affordable will depend in part on what happens to pay and benefits. The U.S. Army and the Marine Corps already plan to cut most of the troops they added for the wars in Afghanistan and Iraq. If Congress allows a slowdown in pay raises and accepts the Pentagon’s proposals to rein in the costs of military health care, then the military might need to jettison another 10 or 15 percent of its planned forces to stay within the BCA’s budget limits. With forces that size, the United States might just be able to carry out a less ambitious version of the strategy of rebalancing toward Asia that officials articulated in January 2012.

If, on the other hand, Congress continues to prevent the pay and benefits changes the Pentagon wants, then the military will have to shrink after only a few years of the BCA’s limits by as much as 25 percent from the size it now hopes to retain. At that level, a far more restrained strategy will be needed: one that gives up on trying to reform the rest of the world’s governments in favor of protecting a narrower range of U.S. national security interests, including the country’s safety, sovereignty, territorial integrity, and relative power position. Restraint would mean going to war only when narrowly defined security interests were at stake and having allies provide for more of their own security. This strategy may not be the one Obama officials prefer, but it is the strategy that will be forced on them unless they can come to an agreement with Congress to avert the mandatory cuts.

REBALANCING ACT

Once the government agrees on what strategy the country will pursue, it will need to reshape the military to reflect it. Defense planners will face crucial choices about what to jettison, what to keep, and where to add. Resource constraints will force tradeoffs among the armed services, between active and reserve forces, and among force structure, modernization, and readiness.

If the White House and the Department of Defense really want the United States to focus more on the Asia-Pacific region, as they claim to, then it makes sense to shift resources toward maritime forces. Wars in that region are more likely to be fought at sea than on land. Moreover, if the United States is planning to avoid future stability and counter­insurgency operations, like those in Afghanistan and Iraq, which require large numbers of boots on the ground over multiple rotations, then the military will need considerably fewer ground forces. Hagel suggested as much when he reported on the SCMR in July 2013.

Yet Hagel may find it difficult to deliver on that recommendation. At least since the 1970s, the Department of Defense has allocated budgets among the armed services according to the same formula every year, with the shares of the budget awarded to the army, the navy, the air force, and the Marine Corps rarely varying by more than one percent from year to year. Changing the mix of forces will be politically daunting. Others have tried and failed. In 2001, for example, Secretary of Defense Donald Rumsfeld launched a major internal review of the Pentagon’s strategy. After rumors swirled that he wanted to cut ground forces to free up money for airpower, space systems, and missile defense, the army and key members of Congress balked. In a letter to Rumsfeld, 82 members of Congress warned him not to cut the size of the army. The services’ budget shares did not move.

But given the coming cuts and the country’s stated grand strategy, policymakers will have to overcome their aversion to a smaller army. If, on the other hand, the Pentagon continues to allocate money according to the same formula as before, it will have a hard time convincing Americans that it really intends to rebalance away from protracted ground operations and toward Asia.

As they bring the military’s ground forces in line with budgetary realities, officials would also be wise to disproportionately favor the reserve component, which includes the National Guard and the Reserves. When deployed, reserve forces cost as much as active-duty ones, but in peacetime, they cost just a fraction of their full-time counterparts. And they can be just as effective. Before 2001, U.S. reserve units were generally less well equipped and less ready for their missions than their active-duty counterparts, but that changed in Afghanistan and Iraq. The army invested appreciable resources in its reserve component, outfitting it with new equipment instead of hand-me-downs from the active forces and staffing and training units for multiple deployments. As a result, today, Army National Guard and Army Reserve units are arguably better equipped and more ready to fight than at any time since World War II.

If the U.S. government is truly serious about avoiding long wars that require multiple reserve call-ups, then the reserve forces will prove a particularly cost-effective alternative to maintaining high levels of active-duty troops. Even if their readiness drops back to pre-9/11 levels as the experience accumulated in Afghanistan and Iraq recedes, the reserve forces could still be readied for war within a year or less. And if the army ends up taking steeper budgetary cuts than the other services, then favoring reserve forces would allow the army to avoid just the kind of devastating reduction in size that its advocates so fear: if the reserve forces were kept at their current sizes, the army could retain about 150,000 more soldiers across its total force than if the reserves were cut in lockstep with the active component.

Compared with the shift toward naval forces, the politics of favoring the reserves should be easy. If the secretary of defense proposes keeping more National Guard and Reserve forces at the expense of active-duty ones, senior leaders from the active component will no doubt cry foul. But Congress is likely to side with the secretary on this one. The National Guard has powerful champions in statehouses and on Capitol Hill, and history suggests the active component will lose if it comes to a showdown. Even the air force’s modest proposal last year to eliminate 5,000 positions from the Air National Guard was met with fierce resistance from its advocates; in the end, lawmakers allowed only 1,000 slots to be cut.

READY OR NOT

More generally, the Pentagon faces important tradeoffs among force structure, modernization, and readiness. In the SCMR, the Defense Department explored two options: keeping a larger total force but spending less to outfit it with new equipment or making deeper force reductions to free up more money for modernization. The first option would safeguard the force’s size and presence for today’s missions; the second would lead to a smaller but better-equipped military. Given the abruptness of the BCA’s cuts, the best choice between these two is actually a phased approach: cut modernization disproportionately at first, while drawing the forces down to sizes that will be affordable over the long term, and then increase equipment purchases to the level needed to outfit the remaining forces. Unfortunately, the SCMR did not view readiness as an element that could be traded off deliberately against force size or modernization. Yet targeted adjustments to readiness could free up money for forces and equipment without harming the effectiveness of the military’s missions.

A phased approach to force size and modernization makes good sense in today’s world, where existential war is no longer imminent and the United States still enjoys vast military superiority. A two- or three-year slowdown in development and procurement would also give the services time to consider cheaper alternatives to their present modernization plans -- for example, extending the life of existing equipment or choosing materiel that incorporates technologies that are already well understood.

Policymakers often associate any drop in readiness with the 1970s, when soldiers had to buy their own training shoes because the army ran out and airplanes had to be grounded for lack of maintenance crews. And they worry that curtailing readiness could mean reliving the disruptive first months of sequestration in 2013, when ships had their deployment orders canceled abruptly, fighter squadrons were grounded at the last minute, and scheduled army training sessions were called off. But keeping the entire force ready for war at a moment’s notice costs money that could be better spent elsewhere, and there are good reasons to give up some near-term mission readiness in exchange for keeping more forces or building more equipment. If planned and targeted, reductions in readiness could avoid major disruptions and serve strategic purposes.

In fact, the army and the navy are already quietly tinkering with their readiness. For example, the army is now planning to fully staff and equip only those units that are preparing to deploy soon, leaving those scheduled for later rotations somewhat less ready. The navy is also exploring options to “adjust the readiness of non-deployed forces,” in the words of Admiral Jonathan Greenert, the chief of naval operations.

Steps such as these could free up funding for changes in force structure and modernization. And the military could go even further than it already has, undertaking additional deliberate, targeted reductions in immediate readiness. For example, the navy could move some ships into storage and convert some to reserve status. The army could sharply reduce the junior ranks in selected combat brigades, retaining key officers and enlisted personnel to train and lead brigades that could be fully manned when needed. If planned carefully, such moves would ensure a stronger and more durable military than would wholly eliminating ships and brigades. But they will require officials to stop reflexively associating readiness cutbacks with the hollow forces of former times.

SMARTER CUTS

Whatever choices defense leaders ultimately make about force structure, modernization, and readiness, meeting the BCA’s budget limits will require a sizable drawdown of military and civilian personnel. The quickest and cheapest way to cut the forces is to stop bringing in new people, and indeed, the Pentagon has enacted a near freeze on civilian hiring. In a July 2013 letter to Congress about the potential effects of a 2014 sequester, Hagel forecast the same fate for military recruiting.

But quick and cheap can create big problems later, so the military should be smart about its personnel cutbacks and spread them across the ranks. In the early days of the military’s post–Cold War downsizing, the air force reduced its intake and training of new pilots by about two-thirds, only to wonder several years later why it did not have enough pilots in the middle ranks. Over the same period, the army made sharp cuts to its annual intake of young officers and later suffered from a shortage of captains. Within a decade, it found itself with too few majors. To fill the gap, in 2005 the service promoted almost every captain to major -- a step ridiculed on the inside as the “no captain left behind” program -- and promoted nearly 90 percent of majors to lieutenant colonel. Looser promotion standards have left, and will leave, a lasting mark on the quality of the officer corps.

The services can afford to slow recruitment disproportionately for a year or two, but if they reduce their intake for much longer, they will end up with similar problems. To avoid that fate, the Pentagon must shrink personnel at all levels of seniority. For civilian employees, this means eliminating jobs at the middle and senior levels as well as jun­ior positions. For service members, it means the strict enforcement of up-or-out rules, coupled with discharges and voluntary buyouts.

Shedding personnel carries high costs initially: encouraging employees to leave voluntarily requires financial inducements, and involuntary discharges involve transition and unemployment costs. Military leaders rightly point out that those bills would eat into the funds needed for the force structure, modernization, and readiness they hope to protect. Nevertheless, for the sake of its long-term health, the Pentagon must accept some near-term tradeoffs. The department could, for example, further slow planned equipment purchases and curtail the readiness of some units for a time. Because the forces must be reduced quickly to meet the BCA’s targets, the personnel drawdown and the compensating cutbacks required in other areas should last for only a few years. But the benefits of cross-cohort force reductions would last for decades.

LEANER AND MEANER

The White House, the Department of Defense, and Congress face big choices in dealing with the coming budget cutbacks, and their decisions will determine the size, shape, equipment, and readiness of the military for decades to come. Already, the cuts required by the BCA have changed the military dramatically, with civilians furloughed, hiring frozen, travel budgets zeroed out, and ships stalled in port.

Yet officials still hope that a political miracle will spare the Pentagon from the budget ax. That seems unlikely. But even if the BCA is ultimately watered down, the department will face a future fiscal environment that is far tighter than the one it enjoyed for the past 15 years. The sooner it starts making tough choices, the better.

Up until now, change has been hard. For the secretary of defense and his senior staff, it’s easier to put off decisions than to face down the army or push back against active-duty chiefs in the fight over budget shares. For the service chiefs, it’s hard to tell midlevel and senior people who responded to their country’s call that their services are no longer needed. For lawmakers, it’s hard to look after the long-term health of the military as an institution when veterans’ groups are sending out mass e-mails about the near-term costs of military health care.

Seven months of sequestration have demonstrated the damaging consequences of letting nature take its course. With the war in Afghanistan almost over, it’s time for decision-makers to make decisions. If leaders in government continue to kick the can down the road, the country will end up with a military that shrinks visibly every year under the weight of rising personnel costs, is ready to go to war at a moment’s notice but too small and wrongly designed to fight important missions, and lacks the midlevel people it needs to mentor the junior ones. Alternatively, leaders can bring personnel costs under control, get on with strategic planning, reshape the forces for future challenges in Asia, make sensible choices between active and reserve forces, tailor readiness for today’s missions, and spread the necessary personnel cuts across the ranks. If they do all that, the U.S. military will emerge as a force that, while smaller than today’s, remains immensely powerful.

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