As Washington is pressured to identify ways to cut federal spending and avert a looming crisis, the defense budget is becoming the prime target for many. It is being singled out as a billpayer despite the fact that defense is a smaller portion of the federal budget today than it has been through most of our post-World War II history.

The Administration's 2010 defense budget cut 50 programs, and the proposed budget for fiscal year (FY) 2011 would eliminate several more. As far as next-generation weapons programs are concerned, there is left little left to kill.

Although the budget request would increase the overall defense topline by between 1 percent and 2 percent in real terms, the budget is still insufficient to pay the Pentagon's bills. What does that mean? The Pentagon cannot afford to fund the programs currently on its books, much less those planned in the outyears. In fact, the nation's defense plans have become so chronically underfunded that it is a point of agreement between most defense analysts of all stripes that there is a large--and growing--shortfall.

With such tight defense budgets, core defense capabilities are being shortchanged. Congress needs to address the numerous sources of strain on the defense budget, enact meaningful reforms that improve efficiency, and stop avoiding the third rail of defense budget debates--the rapid escalation of military compensation, retirement, and health care costs.

Strains on the Defense Budget

Secretary of Defense Robert Gates has called for more spending cuts to keep the defense budget flat for the future. But these cuts will not eliminate the chief problem: The defense budget is projected to remain static or decline, yet the nation seems likely to keep asking the military to do more with less.

This is the primary reason defense dollars are increasingly stretched. An honest solution would be to either match defense budgets with missions or to reduce U.S. foreign policy commitments. While Gates says there simply cannot be growth in defense budgets, the fact is that what America chooses to spend on national security remains a deliberate, political choice.

There are, however, legitimate other reasons why defense spending is constrained. These include:

• Historical hangovers. Years of underinvestment in defense--especially during the 1990s--have had lasting effects. It hasn't yet been possible to catch up, especially with the military at war since 2001.
• Crowding out by domestic entitlements. Exploding domestic entitlements, health care costs, and bailouts are squeezing the defense budget. If left unchecked, their growth would eventually consume all federal tax revenues.
• Defense entitlements pressure on modernization. Paralleling the trends in the larger federal budget, key defense spending priorities are being crowded out by escalating personnel costs, particularly health care programs and numerous permanent but unfunded deferred and in-kind benefits.
• Decreasing economies of scale. The cost of equipment is rising faster than the overall defense budget and outpacing inflation in the wider economy. A chief cause of this problem is due to declining build rates and lost economies of scale. Other factors include the rising costs of fuel, input materials, labor, and increasingly complex systems.

Over the next ten years, defense is set to decline by every measure, including as a size of the economy; as a percentage of the federal budget; and, in real dollars. Between 2010 and 2015, total defense spending is set to fall from 4.9 percent to 3.6 percent of gross domestic product (GDP), even though the nation continues to assign additional roles and missions to the military. The growing disparity between funding and requirements is the primary cause of the increasing strain on the defense budget, but numerous other external and internal factors also are contributing to the problem.

External Causes of Defense Budget Erosion

In 1994, defense analyst Kevin Lewis pointed out, the defense budget experienced "slow erosion" during most periods of recent U.S. history, interspersed with event-driven booms. These swings in the defense budget have undermined the development of a stable, coherent defense program designed with sufficient regard for the long term.

Common sense dictates that the Pentagon should take advantage of peacetime lulls to replace damaged or destroyed equipment, to upgrade legacy systems, and to purchase next-generation replacements to avoid predictable shortfalls in future force structure. Yet most Administrations have failed to do so.

The systematic tendency of planners to underestimate costs and expand requirements often leads Congress to appropriate inadequate funding at the front end of procurement programs, which results in unexpected, unbudgeted costs later in the process.

Additionally, the rapid expansion of domestic entitlements, the recent passage of costly health care legislation, and the unprecedented growth of public debt are certain to create extraordinary pressure for further cuts in the defense budget. Today, defense accounts for less than 20 percent of the federal budget and is falling. Entitlements now account for around 65 percent of all federal spending and a record 18 percent of GDP. The three largest entitlements--Social Security, Medicare, and Medicaid--eclipsed defense spending in 1976 and have been growing ever since.

Internal Causes of Defense Budget Imbalance

The portion of the defense budget devoted to operations and support (O&S), which includes the military personnel account and the operation and maintenance account, is expected to grow to 64.5 percent of the total defense budget in 2011 and 72 percent by 2028. This is more than double the share allocated to modernization.

The cost of paying those in uniform, particularly deferred and in-kind benefits that are increasingly too often permanent unfunded entitlements added by Congress, is rising unsustainably despite only marginal increases in the number of ground force troops and recent reductions in Navy and Air Force endstrength.

Defense health care is like a Petri dish illustrating the larger problems happening in health care on a national scale. Military medical programs account for almost half of the recent growth in O&S funding. The CBO estimates that real spending on medical programs will more than double under the Pentagon's current plans, from $44 billion in 2009 to $90 billion in 2028, far outpacing inflation in the wider economy. Over the past decade, Congress has added new pension benefits and authorized large pay increases without ensured funding, all of which are contributing to rising personnel costs. Add to that a flat defense budget and something has to give since personnel are clearly "must pay" bills.

Constant wartime deployments for missions in Afghanistan and Iraq are another internal strain on defense budgets. According to the Center for Strategic and International Studies, the projected costs of replacing vehicles, armor, and helicopters already exceed the Army's budget by billions of dollars each year. The defense budget will endure additional strain as only select funding from the overseas contingency operations budget is continuously shifted into the base defense budget.

In addition to the wartime damage sustained by military equipment, ordinary aging imposes significant costs. Scarce defense funds are being used to maintain, repair, upgrade, and fuel old platforms that badly need to be replaced by more efficient next-generation systems.

Military equipment is becoming more expensive primarily as it becomes increasingly advanced technologically. Other cost drivers include a shrinking workforce in the design, engineering, and manufacturing sectors and soaring prices for input materials, including certain metals. Furthermore, per-unit overhead costs at production facilities have increased as the total number of units produced has steadily declined.

Generally, the military services have responded to rapid cost growth by reducing procurement rates thereby creating a vicious cycle. Increasing costs have reduced acquisition plans even further, perpetuating the dysfunctional cycle at enormous cost and with significant consequences for the force.

Many of the changes implemented to streamline the defense acquisition system have instead added layers of regulations and complex requirements that have made the process less competitive, more costly, and more cumbersome without adding accountability to the process.

The persistent mismatch between defense plans and budgets translates into gaps in each of the military services' capabilities. The immediate consequence is that many high-priority defense programs are being cut or cancelled because of artificial budget constraints, not because of changing military requirements. The long-term consequence is that the Defense Department is failing to build the capabilities that it has long-identified as necessary to defend America's interests.

Solving the Problem

Closing the gap between the Defense Department's modernization requirements and the funding allocated by Congress will require honestly assessing the underlying causes and repudiating failed solutions. To ensure that resources are allocated wisely, Congress should:

Smooth the defense budget peaks and valleys through more predictable outlays. Through its annual budget resolutions, Congress should sustain a defense topline that outpaces inflation for at least three years after the wars in Iraq and Afghanistan subside.

Control entitlement growth, domestic spending, and public debt. Congress urgently needs to begin substantively addressing entitlement reform as a national security challenge, both for the sake of the government's fiscal health and to fulfill the government's constitutional responsibility to provide for the common defense.

Align military compensation with 21st century workforce demands. Four out of five servicemembers will not stay in the military for a full twenty years. Typically, more cash up front is valued higher by those serving only one or two tours versus the majority of uniformed compensation: deferred and in-kind benefits. Current military compensation is based primarily on a "one size fits all" approach: the longer you serve, the more you'll earn. That doesn't accurately reflect the demands of America's youth. Defense officials and Congress could start by aligning military compensation with the needs of a highly-mobile 21st century workforce.

Address the primary causes of defense inflation. Robust and stable modernization funding will support higher and more efficient production rates, restore economies of scale, and cut unit production costs. Avoiding budget spikes would also provide stability in defense planning and offer a steadier workload for the industrial base.

Increase foreign military sales. Government leaders need to further ease restrictions on sales of select platforms to U.S. allies and partners both to achieve more efficient production rates and to offset costs borne by the U.S. taxpayer.

Increase international defense cooperation. Congress should support greater allied involvement and burden sharing in procurement, research, and development. The U.S. should facilitate partnerships with allies during the development phase of weapons programs when feasible.

Continue to reform the wider acquisition process. Improving and updating the military's acquisition process will require that Congress take the lead on initiating a wider reform agenda, including restoring systems engineering teams within the acquisition buying divisions, simplifying acquisition criteria, carrying competition well into the production phase, and carefully deregulating the defense market to remove barriers to entry.

Support performance- based logistics management. Congress will need to explore additional opportunities to apply performance-based logistics as part of defense systems lifecycle management.

Conclusion

Defense is often seen by policymakers as an attractive pot of cash that can be raided without obvious or immediate consequence. Of course, in the long run, lower defense spending leads to a smaller force, reduced troop readiness, longer deployment times, less capable weapons systems, and ultimately the de facto or overt abandonment of America's security commitments around the world.

Five times in the past century, the U.S. has fought a major war and then promptly disarmed, with damaging and avoidable consequences. Congress should not repeat the same mistake yet again.