This report assesses the cost-effectiveness of using the Voluntary Separation Incentive Payment (VSIP) program — a downsizing tool available to U.S. Department of Defense (DoD) personnel managers — to reduce the size of the DoD civilian workforce, in conjunction with or instead of imposing involuntary separations. It also considers how the amount and structure of VSIP could be improved.
Workforce Downsizing and Restructuring in the Department of Defense
The Voluntary Separation Incentive Payment Program Versus Involuntary Separation
- What are the relevant policies, incentives, and pays available for workforce downsizing and restructuring in DoD? How has DoD used these different policy approaches in the past, and what are their advantages and disadvantages?
- What is the retention responsiveness and the cost effects associated with changes in VSIP? To what extend are the separation effects of VSIP lower because the real value of VSIP has declined over time?
- How cost-effective is it to achieve a drawdown with voluntary incentives versus other approaches, including involuntary separation and a combination of involuntary separation with VSIP?
- How could the VSIP cap, and the structure of VSIP more generally, be improved so that VSIP is effective in inducing adequate voluntary separations and is cost-effective relative to other downsizing strategies?
The U.S. Department of Defense (DoD) plans to reduce the size of its civilian workforce through 2021. An important downsizing tool available to personnel managers is the Voluntary Separation Incentive Payment (VSIP), but its cap, $25,000, has not been adjusted since 1993.
The authors of this report used RAND's dynamic retention model (DRM) for DoD civilians to compare the cost-effectiveness of alternative approaches to achieving a given downsizing. These include packages of VSIP, voluntary early retirement authority (VERA), and involuntary separation if also needed, versus using involuntary separation alone.
Increasing the VSIP cap to $41,000 (the real value of VSIP in 2015 dollars) increases voluntary separations by about 45 percent and, compared with the $25,000 cap, would result in greater net savings to DoD and greater net savings in government outlays over five years. Although the apparent cost savings, as reflected in the budget, are greater when involuntary separations are used, there are off-budget costs, such as workplace turmoil, disruption, and lower morale, associated with involuntary separation. The authors used the DRM to estimate the cost borne by employees who are involuntarily separated in terms of the value of the loss of employment, net of the severance pay they receive. Such costs could potentially hurt retention and workforce productivity among those who remain. Using this broader concept of cost that includes both the cost to the government and the cost borne by employees, VSIP generates more net savings and is more cost-effective at the margin than involuntary separation.
VSIP Is an Effective Method of Generating Additional Voluntary Separations
- Increasing the Voluntary Separation Incentive Payment (VSIP) cap from the current $25,000 to $41,000 (the real value of VSIP in 2015 dollars) generates about 45 percent more separations, and increasing the real value even more — say, to $55,000 — generates even more separations.
- VSIP produces budgetary net savings to DoD both after the first year and cumulatively after five years. VSIP also produces net cumulative savings to the Treasury over five years. Furthermore, the net savings to DoD and the Treasury are larger over a five-year horizon when the VSIP cap is larger.
- Changing the VSIP formula by allowing VSIP to be the maximum, rather than the minimum, of the cap and severance pay would generate a larger number of VSIP takers, at significant net savings to DoD and to the Treasury.
Involuntary Savings Generate Budgetary and Outlays Savings but Impose Other Costs
- Using involuntary separations alone generates more budgetary and outlays savings over five years than using VSIP, as does a mixed strategy involving a VSIP offer and the possibility of involuntary separation.
- However, these budgetary and outlay figures do not incorporate the cost borne by individuals who are involuntarily separated, a cost that could hurt the retention and productivity of those who remain. When this cost — the value of these individuals' lost careers, net of severance pay — is incorporated, involuntary separation is less cost-effective at the margin than VSIP.
- The authors likely underestimate the cost-effectiveness of VSIP versus involuntary separations, because their estimates do not include other, difficult-to-quantify costs to DoD associated with involuntary separations, such as lower morale, turbulence, disruption, and possible resulting skill and experience imbalances.
Table of Contents
Review of Severance Pay, Voluntary Separation Incentive Pay, and Voluntary Early Retirement Authority
Overview of Dynamic Retention Modeling Capability
Responsiveness of Separations, Costs, and Outlays to Changes in VSIP
Separations, Costs, and Outlays Under RIF
Review of the Literature on Private-Sector Downsizing Practices