Widespread Misconceptions about U.S. Military Salaries
November 29th, 2014
I've noticed that few people actually know how much money military members earn. Even among military members, there is a general lack of knowledge on the subject and a surprising amount of misinformation spread among the troops. While a quick Google search will indeed yield results, the numbers shown on most websites do not tell the whole story. Aside from being formatted in tables that are unintelligible to the average person, Basic Pay figures are not comprehensive. There are sizable monetary allowances not mentioned anywhere on many of the websites you'll find and significant tax breaks that need to be taken into account before arriving at the final equivalent civilian salary. Many people would be surprised by how high military salaries actually are.
I'll show you some examples of military salaries below, describe how I arrive at those numbers, and finally explain why I think overcoming these misconceptions could be a significant aid in attracting and retaining quality military members.
Military Pay Structure
The first thing I need to point out is that total military pay is composed of money from a few different sources. Although all of it is delivered by one paycheck into service members' bank accounts, portions of that money are categorized before distribution for tax and appropriations reasons. Every military member is given money (or sometimes accommodations of equal value) from the following three sources:
1. Basic Pay
2. Basic Allowance for Housing (BAH)
3. Basic Allowance for Subsistence (BAS)
Basic Pay is what you see on most of those cryptic tables you find when you Google "military salary". Basic Pay is subject to taxes and varies based on rank and years of service. BAH and BAS are the two standard tax-free allowances for housing and food. BAH varies by location and increases by rank, but BAS is a flat amount for officers and a different flat amount for enlisted. Many military members are given additional allowances and bonuses beyond BAH and BAS (for example, members in aviation-related jobs receive additional incentive pay), but BAH and BAS are the standard two allowances received by everyone, so I'll only include those two allowances and Basic Pay in my calculations. Basic Pay, BAH, and BAS are typically listed as monthly amounts.
Methodology
The most accurate way I see to calculate equivalent salary is to take total after-tax income and calculate the gross income that would be required in a regular job to take home the same amount. When salaries are discussed anywhere—among friends and colleagues, at job interviews, when applying for a loan—pre-tax, gross income is always the value discussed. I've never heard anyone talk about how much they earn after taxes are taken out, even when reporting income for various official purposes. Additionally, the number I arrive at is the actual salary you'd have to earn in a regular job to have the same take-home pay, so I think this is the most valid way to express a military member's equivalent salary.
I'm drawing values from the following three references:
I'm also using this calculator to do a lot of my calculations, and I'm assuming no state income tax. That's not a terrible assumption for two reasons. First, a military member can choose to keep throughout his career either the state residence he had when he entered the military or any state residence he has the opportunity to acquire during his career. That means military members have a decent opportunity to pick up residency in a state with no income tax. Second, even if that doesn't happen and the member has to pay state income tax, that is an additional tax advantage that could be attributed to his untaxed BAH and BAS, reducing or eliminating (or in some cases, even increasing) his equivalent salary.
Equivalent Salaries
Military members are paid very well, enlisted included. I’d argue that officers may even be overpaid. Before you dismiss those claims, realize that the average 18-year-old enlisting right out of high school makes the equivalent of over $40,000 per year with zero experience. I've even had enlisted members reject that claim, so I understand if you're incredulous. Here are my calculations for those of you in disbelief:
I will note that, in most cases, very junior enlisted members are forced to live on base for the first couple years of their enlistments. Those members live in a furnished studio apartment and have access to free food, but do not receive BAH or BAS. With few exceptions, I would argue that the value of their provided accommodations is about equal to the allowances they are giving up—making the difference a wash. I'd be happy to discuss this topic further with anyone interested, but most people reading this probably aren't concerned with that.
How many other jobs pay 18-year-olds with no experience over $40k/year with exceptional benefits, paid training, and job security? Not many. It isn't only fresh recruits who are paid well, either. Here are additional examples of salaries for enlisted and officers at various points in their careers:
As you can see, salaries in the military are extremely competitive throughout the ranks. From the teenager making $42k/year to the 34-year-old making almost $120k, it is difficult to argue that the military is not paid well, especially when you consider the fact that these figures do not include the extremely generous military benefits, including, among other benefits, 100% free health care, paid education, and an unbeatable pension requiring no monetary contributions.
The Pension
Let's take a closer look at that ridiculous pension. You're eligible to retire from the military with a pension at or beyond 20 years of service. You collect your retirement pay immediately after retirement until the day you die at 50% of the average of your highest three years of Basic Pay, and you receive an additional 2.5 percentage points for each year beyond 20. For example, a member retiring at 25 years of service would receive 62.5% of his Basic Pay every month until his death.
If the enormity of that pension hasn't already hit you, let me explain how much that pension is worth through an example. For an officer retiring at 20 years as an O-5 (fairly typical), his monthly retirement income will be $4,211.10, increasing annually for inflation. This officer is typically around 42 years old and will draw this retirement income until his death, so his retirement is essentially a Single Life Annuity. For simplicity, we'll pretend his monthly income isn't adjusted for inflation each year (although that fact is worth a lot of money). Shop around and you'll see that, currently, a Single Life Annuity paying $4,211.10 monthly for someone 42 years old will cost you around $1.2 million. Again, that isn't even including the inflation adjustments, which would add a significant amount to that figure.
How much would it cost to save up for that annuity over a 20-year career? If you look at an investment calculator, you can see how much you'd need to invest in the stock market over 20 years to end your career with $1.2 million. Assuming an annual rate of return of 10% in a large-cap stock market index fund and average annual inflation of 3%, we will have an adjusted average annual return of 7% (I'm erring on the side of a higher yield). If you run the numbers at 7% to save for $1.2 million, you'll find that you need to save $2,300 every month during your 20-year career to save enough to purchase an annuity equal to the one provided by the military. In other words, that O-5's retirement is worth a minimum of an additional $27,600/year throughout his career. That is a very low estimate too, since adjustments for inflation would add significant cost to the annuity. Furthermore, most people do not invest 100% of their money in stocks and would not achieve a 7% return. If you decided to save cash without investing anything, you'd have to save over $6,800 per month for your entire career to save up enough for that same annuity, bringing the total annual value to $81,600 on top of his already-excellent salary.
How much should be added to his equivalent salary—or whether any should be added at all—could be debated, so I won't add it on. You can see, however, that military retirement is very valuable.
Why does all this matter?
How many Americans know how good the money is in the military? I’ve actually had a family member ask me whether the military even paid me a salary, or if they just provided me with housing and food. There is clearly a disconnect and lack of communication to the masses. In top high schools and colleges around the country, look at how many people choose to enlist or commission. The numbers are almost zero, even during times like this when the military is practically worshipped by the American public.
A key element in retaining good people in the military is attracting good people to begin with, and simply making more people aware of military salaries would be a great start. I'm not implying the military doesn't get some good people, but they could certainly do a better job of appealing to high achievers. I've never seen a single military recruiting advertisement targeted toward high achievers. They all tend to appeal to emotion, self-sacrifice, "the greater good", etc., and while many of those values are worthy of pursuit, those methods of recruiting don't often appeal to people who have lots of options. In fact, aside from maybe the service academies, many people who turn to the military do so because of a lack of options or financial resources. In some families and areas of the country, you’re even seen as a failure for choosing to join the military—as though you've ran out of options—especially if you choose to do so instead of immediately attending college.
Adequate communication of military salaries and benefits to the general American public is something that is severely lacking. When you google "military salary," what comes up are those Basic Pay tables I discussed, which look atrociously low. Even the primary United States Air Force recruiting website only shows Basic Pay tables with a small note about benefits. Little does everyone perusing that website know, as I've shown here, that the equivalent salaries are actually extremely competitive. How many people look at those Basic Pay tables and immediately dismiss the military as an option? Simple knowledge of these facts could attract many talented people who would be otherwise uninterested in military service. Investment Banking, known for grueling hours and mind-numbing work, still successfully recruits top talent because everyone knows the job pays well. The military both pays well and has some badass jobs.
In short
The military spends literally billions of dollars on recruiting each year. It blows my mind that almost none of it centers around the excellent salaries, especially when that strategy is a great way to attract talented people. Simple ignorance about the whole system undoubtedly prevents many people from joining the military. If the government would just communicate these numbers to the public more effectively, I think greater numbers of talented people would join and fewer talented people would leave.