February 04, 2013

The Right Way to Cut Pentagon Spending

Whether or not Congress avoids sequestration by March 1, defense spending will likely be cut by at least 10% over the next decade. As 20% of the federal budget and 50% of discretionary spending, it will be part of any longer-term budget deal.

Unfortunately, the United States has an abysmal record of managing postwar drawdowns of defense spending. Almost all have resulted in a "hollow force"—too much force structure with too little investment in people, readiness and modernization.

Why? Because the easiest way to reduce Defense Department spending quickly is to enact across-the-board cuts in military end-strength, operations and maintenance, and procurement—solving the budget problem on the back of the force rather than on the department writ large.

In past drawdowns after World War II, Vietnam and the Cold War, American planners assumed a period of peace. But as the U.S. transitions in Afghanistan, no such calm appears on the horizon. From instability in the Middle East to al Qaeda's resurgence in northern Africa, North Korea's continued provocations and Iran's dogged pursuit of nuclear weapons, the global security environment remains dangerous and volatile.

In this context, the U.S. must take care to preserve the military capabilities it needs to protect America's interests now and in the future. The armed forces must retain the ability and agility to respond rapidly and effectively to a broad range of contingencies. Deep cuts to force structure, readiness and modernization should be the last resort, not the default course of action.

So where should policy makers reduce spending?

• First, eliminate unnecessary overhead in the Pentagon, defense agencies and headquarters staffs. Since 2001, these have grown like weeds. Over the past decade, the number of DOD civilians increased by more than 100,000, to roughly 778,000 in 2010, while the number of contractors also ballooned.

When I served in the Office of the Secretary of Defense in the mid-1990s, the policy organization had fewer than 600 people. When I returned as undersecretary for policy in 2009, the office had grown to nearly 1,000. While I found efficiencies to reduce my budget by 20%, I did not have the authorities needed to reshape my workforce.

In the private sector, delayering a headquarters typically results in cost savings of 15%-20% and improved organizational effectiveness. Imagine the savings and enhanced performance that could result from delayering the Pentagon. DOD needs Congress to provide additional authorities, such as allowing a reduction in the civilian workforce, to reduce unnecessary costs and reshape its personnel for the 21st century.

• Second, take steps to reduce the costs of military health care without sacrificing quality of care. The current trajectory of the Pentagon's health-care spending is unsustainable. DOD's medical costs have more than doubled since 2001, to more than 10% of the defense budget from roughly 6%, and they are growing faster than any other federal health-care program: 10.6% per year, compared with 9% for the Veterans Administration and 8.5% for Medicare. Overall, U.S. health-care costs are rising 6.3% per year.

Tricare—the suite of insurance programs that cover service members, their families and military retirees—now covers nearly 10 million Americans. But DOD is bearing a disproportionate share of this burden. For example, 52% of the working-age military retirees who are eligible for private health insurance instead choose Tricare as their primary payer, shifting the costs from private companies to DOD.

Out-of-pocket expenses for Tricare beneficiaries haven't changed since the program's inception in 1996, but as costs have skyrocketed the government's share has grown to 88% from 73%. The Defense Department's proposals to increase some copays for non-active-duty beneficiaries have been repeatedly rejected by Congress.

Something has to give. The Pentagon needs to manage these health-care programs more aggressively, and Congress needs to provide the authorities and permission to do so. Otherwise, this critical benefit for service members and their families will become unsustainable and will undermine investment in the capabilities the military needs to accomplish its mission.

• Third, cut excess infrastructure. Since the last Base Realignment and Closure Commission in the late 1990s, Congress has prevented the Defense Department from closing bases it no longer needs or consolidating infrastructure to better support evolving missions. This inability to shed or realign facilities hangs like an albatross around the department's neck, consuming billions of dollars that could otherwise go to readiness and modernization. Congress should grant DOD's request for another Base Realignment and Closure Commission round this year.

• Finally, reform acquisition. While the current administration has made some important progress (the "Better Buying Power" initiative to promote greater efficiency and productivity), far more needs to be done. DOD is still operating with procurement timelines unresponsive to need, perverse incentives for program managers, inadequate numbers of trained acquisition professionals, and insufficient dialogue with industry. Affordable systems and reasonable shareholder return need not be at odds.

No doubt restructuring the defense enterprise will be hard, politically and bureaucratically, but failure is not an option. Failure to find substantial savings in these areas could result in some very unpalatable and dangerous trade-offs, from reducing the military's capacity to prevail in more than one theater at a time to cutting its readiness to deter adversaries or respond effectively in crises.

Although the Senate Armed Services Committee missed an opportunity to address these critical issues during defense secretary nominee Chuck Hagel's confirmation hearing last week, the choice is clear: Either the government cuts costs by fundamentally transforming how DOD does business, or the U.S. risks cutting capabilities critical to national defense and global leadership.

Ms. Flournoy, who served as undersecretary of defense for policy from 2009-12, is a senior adviser to the Boston Consulting Group and co-founder of the Center for a New American Security.