Military vs. Civilian Pay

Who gets the better deal?

by Phil Dyer

With the release in March 2008 of Part 1 of the QRMC (Quadrennial Review of Military Compensation), analysts at the Department of Defense now claim that the military pay gap – the difference in compensation levels between military members and civilian workers – no longer exists. In fact, they contend that total compensation for enlisted members in 2006 was actually $16,000 higher than a civilian counterpart with comparable education and experience, while officers out-earned their civilian counterparts by $17,800. Not so fast, say members of nonprofit associations that support military members. Position papers from MOAA (the Military Officers Association of America) contend that a pay gap of around 3.4 percent still exists and are backing legislation to remedy this. In addition, MOAA’s legislative experts contend the QRMC evaluation doesn’t really account for the major quality of life issues that come with military service, such as frequent deployments, long family separations and danger to life and limb.

Basic Pay

Entry level pay for the military – about $16,000 a year for an E-1 and $30,500 for an 0-1 – aren’t spectacular, but compare somewhat favorably to entry level positions for those entering the workforce right out of high school or college. However, due to the military’s time-in-grade promotion system and lack of performance bonuses, a good performer in the private sector will likely move ahead of a military member in compensation relatively quickly. A good salesperson in many industries can break the $100,000 income mark within 2-4 years while an O-4 (over 12) makes just under $73,000.

This is somewhat offset by re-enlistment bonuses and the ability for service members to chose a domicile state for state income tax purposes. Savvy service members choose states like Florida, Texas and Tennessee that don’t impose a state income tax, allowing them to keep more of what they earn. In addition, when deployed in a combat or contingency zone, most military pay (including re-enlistment bonuses) is income tax-free.

Finally, many military specialties have additional incentive or bonus pay which can boost the service member’s bottom line.

Advantage: Civilian Sector

Housing

The military provides either on-base housing or BAH (Basic Allowance for Housing) for those living off base, as a non-taxable benefit. Regardless of where military members and their dependents go in the world, there is at least some guarantee of decent housing, even if it isn’t swanky. BAH rates in most areas cover basic housing costs, although many service members choose to upgrade their housing choices and pay more out of their pocket. Virtually no civilian sector employer provides this type of benefit.

Advantage: Military

Health care

With health care costs skyrocketing in the private sector and a small, but significant number of private sector workers not covered by a health plan, TRICARE is a valuable benefit for service members. For several hundred dollars per year, TRICARE provides good basic medical care for military families, with minimal out-of-pocket expenses.

The story is much different in the civilian sector. Many workers in the civilian sector pay as much or more each month for health care coverage as military members pay each year. In addition, civilian workers typically pay much more out of pocket in the areas of co-pays and deductibles. This is offset somewhat by the wide availability of FSAs (flexible spending accounts) that allow civilian sector employees (including federal government civilians) to pay out-of-pocket costs with pre-tax dollars.

In addition, many civilian sector health plans are more flexible than TRICARE Prime – which covers most active duty military. Many plans don’t require consulting a primary care physician before seeking medical care and offer broad choice in selecting a personal physician.

Advantage: Military

(with less flexibility)

Retirement

This is probably one of the areas of greatest controversy, and some at DOD are suggesting radical overhauls in the military’s time-honored retirement system. Military retired pay – received after 20 years of qualified service – is similar to a private sector pension plan, with several key differences. First, in the civilian sector, you only need 5 years of qualified service to qualify for pension plans, but payouts similar to military benefits take many years to accumulate. Second, most civilian pensions do not provide cost of living adjustments (COLA) … which are critical for keeping up with inflation. Third, and perhaps most importantly, many civilian sector companies are doing away with their traditional pension plans, choosing to rely on 401(k)-type plans.

Service members have access to additional retirement savings through the Thrift Savings Plan (TSP), although the military does not provide matching contributions. The value of a 20-year military retirement, with COLA adjustments and accessibility as early as age 37, cannot be underestimated.

Advantage: Military

(if you stay for a 20-year career) Retirement

If your service member is considering separating from the military prior to retirement, carefully compare your current benefits to what is available in the civilian sector. You may find you are getting a pretty good deal!