Cut people or change how they're paid

When times are tough, many organizations resort to laying off staff. The U.S. military is no different.

According to a recent report by Fox News, budget cuts are forcing the Pentagon to send "pink slips" to thousands of military personnel, including some currently serving in Afghanistan.

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This is because smaller budgets have forced the armed forces to shrink, especially the ground forces. The active-duty Army is declining 21 percent from a post-9/11 wartime high of 570,000 down to 450,000 soldiers. The Army could fall as low as 420,000, a number Army leaders have made clear would create unacceptable risk to the nation and its defense strategy.

The Pentagon and Congress have another tool at their disposal instead of layoffs: changing how future service members are paid. Unfortunately, most policymakers cannot get past the headlines long enough to realize that this is an increasingly valuable and attractive option to those who may choose to serve.

The Military Compensation and Retirement Modernization Commission (MCRMC) recently released its interim report. In it, the commission highlights how long-term changes in American society since the creation of the all-volunteer force in 1973 have fundamentally changed many of the assumptions that underpin how those in uniform are compensated. As those assumptions grow ever staler, it only stands to reason that the system must evolve to meet the changing needs and makeup of American youth.

For example, today's military is better educated than previous decades. At the inception of the professional military, only 66 percent of active-duty recruits held a high school diploma. In 2013, almost all active duty recruits — 98 percent — graduated from high school.

Today's service members also much more likely to have a family, with 55 percent of the active-duty force married, compared to only 40 percent in 1973.

Moreover, the digital revolution has completely transformed both American society along with its military. Not only is the nation's workforce far more mobile today, but many military occupations teach in-demand skillsets that often translate lucratively into civilian employment.

These societal and demographic changes have major ramifications for the profile of the American military and how it is compensated. A more educated workforce may expect a more mobile employment model with increased flexibility to move across employers. Furthermore, married service members will tend to have more dependents, which increases demand for healthcare benefits and many quality of life programs.

Washington would be wise to take heed and create more value for those in uniform. Rather than simply shrinking the force, policymakers should continue to look for ways to better match expectations to value for tomorrow's troops.

If reforming military compensation is not a viable option and defense budgets continue to fall, the military will only shrink further and faster. A new chartbook from the American Enterprise Institute (AEI) and the Bipartisan Policy Center explores the growth in personnel costs over the past decade in particular.

Although spending on military personnel has consumed roughly one-third of the defense budget since 1980, the total force that share of the budget can afford has steadily declined. For instance, in 1980, this one-third of the defense budget bought a military of more than 2 million active-duty personnel. In 2012, this same share of the defense budget paid for just 1.4 million active-duty service members.

Today's military compensation system is based on many assumptions that are no longer valid. As policymakers think through different options to meet budget caps, they should debate the merits of redesigning military compensation to better reflect the demands of today's society.

Eaglen is a resident fellow at the Marilyn Ware Center for Security Studies at the American Enterprise Institute.