Monday, August 4, 2014

Calculating the Cost Per Active Service Member

I've received a number of questions recently about how I calculate the average cost per active service member cited in this New York Times article and in other publications.  So I thought I'd take a moment to write out my methodology so others can see exactly what is included, what is not included, and how I arrive at 76% real growth from FY 1998 to FY 2014.

Here is the basic calculation for the average cost per active service member:

MILPERS Disc. is the discretionary portion of military personnel accounts which must be appropriated annually by Congress.  This is typically what DoD reports in its budget justification documents.
MILPERS Mand. is the additional mandatory funding in military personnel accounts which does not require an annual appropriations by Congress.  This is primarily funding for the Concurrent Receipt benefit which allows service members to draw military retirement pay and a VA disability pension at the same time without a corresponding reduction in military retirement pay.
DHP is the Defense Health Program.  It is the main source of funding for the military healthcare system for active duty troops, dependents, and retirees under the age of 65.  It is funded through the operation and maintenance title of the budget and is therefore not included in the MILPERS accounts.
OCO MILPERS is the portion of military personnel funding enacted through supplemental appropriations for the wars in Iraq and Afghanistan.  This funds the extra pay and benefits service members received for deployments, and it is subtracted from the numerator because these extra pays are temporary in nature and not part of core compensation.
Guard & Reserve MILPERS is the funding for pay and benefits of Guard and Reserve personnel.  This is subtracted from the numerator because the calculation is for the average cost per active service members only.
# of Active Service Members is the total active end strength for the year, excluding the portion of end strength funded through the OCO budget (since OCO MILPERS is excluded from the numerator).

I use this methodology to calculate the average cost per active service member in FY 1998 and FY 2014.  I chose FY 1998 as the starting point because it is the bottom of the last defense draw down and the point at which personnel costs began to grow significantly.  It also happens to be the year I was commissioned into the Air Force Reserves.  If you choose a later starting point, the growth would be smaller.  If you choose an earlier starting point the growth would be larger.

Most of the data can be found in the DoD Green BookM-1 budget justification, and OMB's Budget Database.  I use budget authority for calculations rather than total obligational authority or outlays, although the results would only differ slightly using these other measures.

Next, I adjust for inflation using the GDP price index published by OMB in Historical Table 10.1.  I use this measure of inflation because it is a broad measure of the change in prices in the overall economy.  DoD's internal inflation measure for personnel costs tends to overstate inflation relative to the GDP price index because it counts pay raises as inflation even if the raise is far above the rate of inflation.  In other words, DoD's inflation metric counts much of the growth in personnel costs as inflation rather than cost growth.  While DoD's inflation metric is useful for planning future budgets, it is not useful for understanding how much personnel costs have grown above general inflation.

Here is a table with all of the numbers so you can check my math:

FY 1998
FY 2014
Total MILPERS Discretionary
$69,822 M
$144,007 M
Total MILPERS Mandatory
$0 M
$6,337 M
Defense Health Program
$10,349 M
$33,181 M
Guard/Reserve MILPERS
$9,475 M
$19,843 M
$0 M
$8,083 M
Active End-Strength in Base Budget
Cost per Active Service Member (then-year)
GDP Price Index (2015 base year)
Cost per Active Service Member (2015 dollars)
Growth from FY 1998 to FY 2014:

It is also worth noting the personnel costs that are not included in this calculation.  I am not including in-kind benefits such as commissaries, DoD's K-12 schools, childcare, etc.  I am also not including personnel-related costs paid outside of DoD's budget, such as the GI Bill and other veterans' benefits and services, tax exemptions for military personnel, and Treasury payments to cover the unfunded liabilities in the military retirement and healthcare funds.  The benefits funded outside of DoD's budget total some $258 billion in the FY 2015 budget request--more than the costs within DoD's budget.