Most Military Reservists See Earnings Increase When Called to Active Duty

Most U.S. military reservists see their earnings increase when they are called to active duty, contrary to the common belief that the earnings of reservists fall when they are activated, according to a RAND Corporation study issued today.

The study by the nonprofit research organization, titled “Activation and the Earnings of Reservists,” examined reservists who served less than 30 days on active duty in 2000 and more than 30 days in 2002 and 2003. It found that:

• 83 percent of reservists did not lose earnings when activated. Only 17 percent experienced a drop in earnings.
• The average earnings of the activated reservists increased by 32 percent – amounting to $13,539.
• 6 percent of activated reservists had an earnings loss of more than $10,000. A total of 11 percent had an earnings loss of more than 10 percent of their previous year's earnings.

“Typically, these reservists are people in their mid 20s to mid 30s, with some college but not necessarily a bachelor's degree,” said David Loughran, a RAND economist and lead author of the study. “Generally, military pay is quite good for this group. Moreover, reservists receive additional special pay when activated and their earnings are not subject to federal taxes.”

The study also finds that 40 percent of reservists who were not activated in the period studied experienced an earnings loss as civilians. Since only 17 percent of activated reservists experienced an earnings loss during the study period, this finding suggests that being activated actually reduces the likelihood a reservist will experience an earnings loss.

“We tend to think of the civilian labor market as relatively static, but it's incredibly dynamic,” said Jacob Klerman, a RAND senior economist and co-author of the study. “Sometimes people earn more from one year to the next, but sometimes people see their earnings drop from one year to another.”

Researchers were unable to pinpoint any one particular group as being more likely to suffer earnings losses, but are continuing to look at whether any particular military occupation is more likely to experience a drop in earnings. The results of that study are expected next year.

The earnings issue is critical, both from an equity standpoint and from a recruitment perspective, the study said.

However, the RAND study did not consider the fact that some reservists have additional expenses while on active duty. It also did not address the issue of whether reservists' pay adequately compensates them for the disadvantages of serving, such as the risk of death or injury, separation from their families, and living under harsh conditions.

The study also did not examine what happens to the reservists' spouses' earnings while the reservists are serving on active duty. In addition, the authors write that more research is needed on what happens to reservists' pay after they return to civilian life.

“There may still be a need to raise reservists' compensation in order to continue to fill the reserves to the level to which the president and Congress feel is necessary for national security,” Klerman said.

As part of the Global War on Terrorism, the U.S. military has relied heavily on reservists. More than half of all reservists have been activated since Sept. 11, 2001, and many reservists have been activated more than once. In the Army Reserve and National Guard, the typical activation lasts a year or more. High levels of activation have raised concerns that reservists may suffer substantial financial losses as a result.

“Previously, we had a Strategic Reserves under which we only expected to use the reserves in some total war,” Klerman said. “Under those circumstances, we didn't need to worry too much about what their earnings would be when they were activated. We expected that outcome to be rare and to occur in the context of a national emergency, perhaps including a return to the draft or some other total mobilization.”

“But under the new Operational Reserves, we expect to use the reserves regularly and in circumstances well short of total war,” Klerman added. “We need to think carefully about the lives of reservists when called to active duty and how they will combine that experience with civilian employment.”

A May 2004 report titled “Status of Forces Survey of Reserve Component Members” by the Department of Defense suggested that three-fifths of activated reservists suffer a decline in earnings when activated. This led to several proposals in Congress to improve reservists' financial situation.

However, the 2004 study instructed reservists to report pre-tax earnings. The RAND study takes into account the fact that military allowances and pay received while serving in a combat zone are not subject to federal taxes. Also, the Department of Defense study only included those reservists who responded to a voluntary survey, so the findings might not be representative of all reservists.

The RAND study expands on a preliminary RAND report released earlier this year that found that 72 percent of a small sample of reservists called to active duty experienced an increase in earnings averaging 25 percent above what they earned when not serving on active duty.

The new study improves on those early results by using a more comprehensive sample of reservists and military compensation data from the Department of Defense through 2004, combined with civilian earnings data from the Social Security Administration through 2003.

The research was sponsored by the Office of the Assistant Secretary of Defense for Reserve Affairs and conducted within the Forces and Resources Policy Center of the RAND National Defense Research Institute (NDRI), a federally funded research and development center. The center is sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Department of the Navy, the Marine Corps, the defense agencies and the defense intelligence community.

Printed copies of “Activation and the Earnings of Reservists,” (ISBN: 978-0-8330-3971-2.) can be ordered from RAND Distribution Services (order@rand.org) or call toll-free in the United States 1-877-584-8642.)