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Newsmaker: Dr. Jan D. Eakle
A New Way To Look At Military PayBy Tom Philpott
Fall 2008
The 10th Quadrennial Review of Military Compensation has released the first of a two-part Pentagon study to improve the way cash compensation is measured and adjusted so service pay keeps pace with civilian peers of similar age and education level. (Volume two, due for release later this year, will examine the effectiveness of military retirement and quality-of-life issues.)
Dr. Jan “Denny” Eakle, a retired Air Force brigadier general, is the QRMC’s executive director. Her last assignment in uniform was as deputy director of the Defense Finance and Accounting Service (DFAS). Eakle sat down with Military Money contributing writer Tom Philpott to discuss her report’s recommendations on setting future military pay raises and modernizing other elements of cash compensation.
Is military pay comparable to pay of civilian peers?
We took two approaches to assess that. First, we went back to the ninth QRMC’s standard that military pay should exceed pay levels in the 70th percentile of age and education peer groups. After the 2007 pay raise and recent targeted pay raises for select ranks, we found that regular military compensation [RMC] for every military pay grade and years-of-service point on the pay table now is above the 70th percentile. So we have achieved pay comparability as defined by the ninth QRMC.
But then we’ve gone on to do something different with pay comparability. Current pay comparisons use RMC, which combines basic pay, housing allowances, food allowances and a value for the tax advantage on those tax-free allowances. We propose a new metric to replace RMC called MAC, or Military Annual Compensation. MAC starts with RMC but then adds some things that truly are parts of basic compensation that we haven’t been taking credit for. For example, besides the federal tax advantage on allowances there is a Social Security or FICA tax advantage.
What else would MAC include?
We also want to include state tax advantages, because allowances aren’t taxed as income by the states either. Also, some states totally exempt military pay from taxes. If your own state doesn’t, you still could be living in state X which does exempt military income.
We’ve actually looked person by person through the active-duty population to find what states they are residents of, what states they are assigned to, and we calculated taxes both ways. Overwhelmingly, military people tend to be residents of states that don’t tax military income, like
We looked at two other things besides tax advantages. One is how much money an individual would have to pay out of pocket for healthcare if they weren’t in the military.
Also, we looked at retirement. In the private sector, you have to be vested after (three or six) years under ERISA [Employee Retirement Income Security Act of 1974]. So we asked how much money is the employer putting into retirement for a civilian employee, year in and year out. And we compared that to what military retirement is worth. We discounted it back and calculated the probability they will be around to collect it. For the first five years of service, on the enlisted side, servicemembers actually are disadvantaged because of military cliff vesting in retirement [at 20 years]. But military retirement is better once you get further out.
So this is how we built MAC. It shows that a young enlisted member receives total compensation of about $38,000. By the time they get to 20 years, it approaches $80,000. That is what they would have to earn as a civilian to have the same level of compensation, including retirement, health care and tax advantages. It’s a new way of looking at pay comparability.
So the QRMC has recommended that the Defense Department use MAC instead of RMC to measure pay comparability with civilians of like education and age?
Correct. And if the 70th percentile is the right number for RMC, we concluded that the 80th percentile is the right number for MAC. That is, to maintain pay comparability the military should draw pay at the 80th percentile of civilian peers of the same age and education.
The thing to remember is why we aren’t using the 50th percentile: You have to pay more to military people because of conditions of service and the associated hardships.
We think MAC should be used in future pay comparisons, in part because our personnel today don’t fully understand what their compensation is. This would be a useful tool in educating the force so they can make informed decisions when considering retiring or separating. That is, make truly apples-to-apples comparisons of military compensation versus other offers. We also think this should be used by recruiters in talking to potential recruits about how much they would be making in service.
Can the Department of Defense simply choose to use MAC instead of RMC or does Congress have to approve such a switch?
No legislation is needed to start using this as a tool for counseling. That is what we recommend the services begin to use. But it will have to be a Department decision. [As of June 30, 2008, DoD officials still were studying such a move.]
Who came up with the idea?
It was some of us sitting around thinking about and reading literature on how companies compensate their people. One thing you find is that the private sector very heavily pushes how much their other benefits are worth to be sure their people understand them. We considered other things too [for MAC], such as special and incentive pays, leave and childcare benefits, but settled on these three as things that would enable true comparisons.
Might an advocate for service people say you are pumping up the appearance of military compensation to hold down future pay raises?
Our intent is not to hold down future pay raises. Our intent is to have a better measure to compare two individuals – one wearing the uniform, one in the private sector – and say what would this member in uniform have to make as a civilian to be at the same standard of living.
As former deputy director of DFAS, I know for a fact that people don’t understand their pay. You pick up a pay statement and it has entry after entry after entry, and half the time they don’t know why they are being paid. This will help.
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Tom Philpott writes “Military Update,” a syndicated weekly news column for daily newspapers near military bases. It can be read online each week at www.military.com and www.fra.org.
