A last-minute budget agreement will relieve some pressure on the U.S. defense budget, but cannot resolve basic structural problems that have been growing since 2000. These are a result of war costs, short-sighted decisions by Congress, poor program management and the failure of all parties, over the decade, to take action that saves money in the long term.

The near-panic statements about a “hollow force” and warnings of catastrophic cutbacks belie the fact that military spending remains, in inflation-adjusted terms, at a level only seen once before since World War II, during the Reagan-era build-up. Including war funding (euphemistically termed “overseas contingency operations”), spending in the 2000s was far above Reagan-era levels.

In fact, military spending in fiscal 2014 will remain at all-time high levels if $253 billion in personnel spending that is not included in the Pentagon budget is counted—actually more than half the military's personnel costs are carried “off the books” in this way. The total includes Treasury payments that cover an early-2000s increase in some pensions, the Veterans Administration health care system and other benefits, such as disability pay and some tax exemptions.

Personnel costs increased sharply in the 2000s as Congress repeatedly set higher pay raises than the Pentagon requested. Health care costs also have risen dramatically due to the compound effects of greater costs in that sector and the expansion of Tricare—the Pentagon's health management organization—to cover more retired service members for longer periods. Because Tricare premiums and benefits have been kept stable while commercial-market insurance has become more expensive, more retired military people have chosen it, further increasing its cost.

A remarkable feature of the personnel budget is that most of the benefits—including post-service Tricare eligibility and pensions, which are projected to cost $87 billion in 2014, or two-thirds more than basic pay—flow to the 17% of military personnel who enjoy retired status, having served 20 years or more. The majority of these are officers. Other veterans who have served less than 20 years enjoy far more meager benefits. However, the political reality is that the non-military public is not widely aware of this crucial distinction, so rolling back benefits is troublesome.

Likewise, it is politically difficult for the services to shed infrastructure such as operating bases or depots, which often are large and located near small and midsize cities, and hence are often the economic engines of those regions. Base realignment and closure (BRAC) has been underway since 1990 in five rounds, closely overseen by Congress and hedged about with rules that require the Pentagon to invest in economic development projects and fund environmental clean-ups. Todd Harrison, budget analysis director at the Center for Strategic and Budgetary Assessments (CSBA), notes that the most recent BRAC round—in 2006-11—cost more up front than the previous four rounds put together. The result is that BRAC cannot generate short-term savings.

Depots, and overhaul and maintenance in general, are governed by legal and contractual restrictions. By U.S. law, 50% of Pentagon depot-level maintenance funds must be spent at government depots. Also, contractors fiercely defend what they see as the legal principle that they own the intellectual property in systems they developed for the military. Both these measures sharply reduce the scope for competition in military sustainment.

Finally, investment in new systems, in the past years of fat budgets, has been dominated by two trends. There have been a large number of failed systems that were either canceled outright or have vastly exceeded their unit-cost targets, forcing the services to cut back on production: The Lockheed Martin F-22 and the DDG-1000 destroyer are two examples of the latter. The largest single defense program of all time, the Joint Strike Fighter, would have delivered 600 operational aircraft by now—170 this year alone—if it had stayed on schedule.

Moreover, many of the weapons that were developed and fielded in quantity were tailor-made for the Iraq and Afghan wars—such as mine-resistant, ambush-protected vehicles—and unmanned air systems that cannot survive in the face of advanced air defenses. They are of limited use in different combat scenarios.

The result, Harrison points out, is that the defense budget downturn that is now beginning is different from the downturns after Korea, Vietnam and the end of the Cold War, when the accounts for retirement and personnel were a smaller fraction of the total and the services were flush with new equipment.

The upshot is that production budgets and research and development programs are both under pressure. However, because previous R&D programs have failed and many of the current programs have stretched into decades, the services have no modern systems to buy in many key mission areas (such as U.S. Air Force fighters and Navy destroyers). This has led to a situation in which the ratio of procurement to R&D in the 2000s bumped along at a value between 1:1 and 1.5:1—that is, between a third and a half of acquisition funding was R&D. This balance needs to revert to a more typical historical level (at which procurement is 2-3 times R&D) if the current forces are to be recapitalized, but there is no money to do that.

As a consequence, the services are looking at major cutbacks to forces and activities in order to protect modernization accounts.

In 2014, the Air Force most likely will continue with plans to dispose of entire fleets of aircraft rather than salami-slicing the numbers of every type in its inventory. The latter is incremental at best and counterproductive at worst, because shrinking a force tends to increase its cost per unit. With the former strategy, the Air Force not only reduces numbers, but also eliminates logistics and training pipelines, dedicated infrastructure (such as training simulators) and future modernization costs.

The last item is particularly important for one fleet on the service's chopping block—the 59 KC-10A Extender tankers. Retiring the KC-10s is counterintuitive, since they are just over half as old as the Boeing KC-135 force and carry more fuel. But the tankers have not been modernized since they were delivered. Between now and 2020, they will be increasingly restricted in oceanic airspace unless they are retrofitted with new communication, navigation and air-traffic management avionics.

The same applies to the B-1B. A September 2013 Congressional Research Service report identifies $1.4 billion in modernization projects for the bomber, more than $1 billion of that being in fiscal 2014 and subsequent budgets—$28 million for each combat-capable aircraft. The slightly larger B-52 fleet needs only 20% of that investment—so it is the B-1, not the aircraft that it was once intended to replace, which is vulnerable.

Another fleet at risk—and the most controversial of the USAF's planned cuts—is the A-10 close-air-support aircraft. Before the sequester hit, Air Force plans called for 230 of these rugged and heavily armed aircraft, mostly acquired in the 1970s, to remain in service through 2030. Service leaders now argue that the CAS mission has been performed effectively in 10 years of warfare by F-16s, F-15s, gunships and UAS, and by Navy, Marine and allied fighters, and that the specialized A-10 is not a critical need. However, a political movement to force the Air Force to retain the aircraft is gathering momentum.

The Northrop Grumman Global Hawk Block 30 force also is being targeted. It is expensive, and does not match the veteran Lockheed Martin U-2 in its ability to carry (and provide power to) high-performance sensors. Its electro-optical payload has had a difficult development, and it is little more survivable than the much cheaper General Atomics MQ-9 Reaper. The revelation of the Northrop Grumman RQ-180 stealth UAS points to another Air Force motive for killing the Block 30: It needs the money for the units that will operate the new aircraft.

During 2014, it will become clear whether the Air Force is going to have to cut even deeper to protect its priority programs. The next target will be its prized fighter force. Today, that force faces an increasing challenge because mechanically scanned radars build with 1980s-era technology risk being out-ranged by active, electronically scanned array (AESA) systems. The first AESA-equipped Chinese fighter, the Chengdu J-10B, has just surfaced in what appears to be a production version— and can be jammed by widely available digital radio-frequency memory (DRFM) technology. The only AESA-equipped aircraft in the Air Force operational inventory are F-22s and some F-15s.

The Air Force has upgrade programs on the books for F-15Es, F-15C/Ds and F-16C/Ds, incorporating AESAs radars and other changes. The F-15E radar modernization program has already proceeded into its second low-rate initial-production batch and the sixth batch of AESA radars for the F-15C/D was ordered in June, at which time 46 radars had been delivered. However, the F-15s also need a new electronic warfare system—dubbed the Eagle Passive/Active Warning and Survivability System (Epawss)—and the Air Force is only in the early stages of funding this effort.

As for the F-16, the Air Force has been trying to assemble an international upgrade program called Combat Avionics Programmed Extension Suite (Capes) with costs shared between the U.S. and international partners. The program is managed by Lockheed Martin, which has selected Northrop Grumman to provide a new AESA radar. It also includes a new mission computer and improved cockpit displays. But Capes has stalled due to budget cuts, while a rival upgrade—with BAE Systems as prime and a Raytheon radar—is moving briskly towards a full-scale go-ahead for the South Korean air force.

If Epawss and Capes are truncated or abandoned, the F-15 and F-16 fleets face obsolescence rather than remaining in service in large numbers until 2030, as had been planned.

Meanwhile, the U.S. Navy's aviation community is approaching the point where the Boeing F/A-18 Super Hornet line starts to shut down, with some components going out of production early in 2014. However, the F-35C has not yet landed on an aircraft carrier and is not scheduled to do so until the summer, and the Navy has reduced its planned F-35B/C buy rate from 50 to 40 aircraft per year, saving about $1.2 billion annually. Its ability to keep decks full in the late 2020s will depend on extending the life of the Super Hornet.

The Navy's next big decision concerns the shape of its Unmanned Carrier Launched Airborne Surveillance and Strike (Uclass) program—specifically, how stealthy an aircraft the service can afford to develop on an ambitious schedule. General Atomics Aeronautical Systems has set the low bar with an enlarged development of its Avenger, while Lockheed Martin and Northrop Grumman have shown very stealthy designs based on RQ-170 and X-47B technology. The Navy is still working toward a source selection by the end of 2014.

Outside aviation, the Navy is continuing to reduce its ambitions in terms of shipbuilding, in light of three bad experiences (the DDG-1000 debacle, major overruns in the Ford-class aircraft carrier and the expensive and controversial Littoral Combat Ship). The relatively successful Virginia-class submarine program is planned to continue—including a hull stretch accommodating up to 28 cruise missiles, with a number of design options under consideration—until the SSBN-X replacement for the Ohio-class ballistic-missile submarine takes its place in the shipyards, with construction starting in 2021.

More progress will be made in 2014 on the Navy's most important surface combatant program, the improved Flight III variant of the Burke-class destroyer. One of two Burkes planned for procurement in 2016, and all subsequent ships (at a rate of two per year) are to be Flight IIIs, with a new radar and more capability for missile defense. However, the design has involved difficult tradeoffs involving cost, technology and the ability of the hull to accommodate more systems. Most recently, an X-band AESA tracking radar has been replaced by a less costly and lighter version of the mechanically scanned SPQ-9B, which the Navy maintains will be effective against future missile threats.

As for land forces, the immediate questions are size and readiness. Todd Harrison's CSBA research has punched a hole in the concept of the “golden ratio”—the idea that the services share equally in budgets, downturns and upturns. The Army (and the Marines) gained numbers in the 2000s and are now losing them at a rate that has their leaders concerned; hence the development of the concept of “strategic landpower,” which aims to justify permanent land forces on a similar scale to those built up for the Middle East wars.

United States
Estimated 2014 Budget $612.5 billion ($847.9 billion including
  non-Defense Department personnel costs)
Percent of GDP 4.4
Personnel Under Arms 1.4 million active, 850,000 reserve
Deployments NATO Training Mission in
  Major operations in Iraq and
  Afghanistan, deployments in 90-plus countries