WASHINGTON (Aug. 3, 2013) -- The Pentagon will reduce funding for major headquarters by a fifth, will seek to trim allowances and limit pay raises, and could cut troop numbers and new weapons programs as it plans for what Defense Secretary Chuck Hagel called "unprecedented budget uncertainty."

Hagel and Navy Adm. James A. Winnefeld Jr., vice chairman of the Joint Chiefs of Staff, briefed Pentagon reporters July 31 on the Strategic Choices in Management Review Hagel directed in March. The secretary said the review clarified "the major options and difficult choices ahead."

He noted all future defense cuts will add to the $487 billion reduction in defense spending over the next decade required by the Budget Control Act of 2011, which DOD is implementing.

"If sequester-level cuts persist, DOD would experience nearly $1 trillion in defense spending reductions over the next 10 years," Hagel said. "To help DOD balance strategic ends, ways and means under these budget scenarios, the Strategic Choices and Management Review scrutinized every aspect of DOD's budget, including contingency planning, business practices, force structure, pay and benefits, acquisition practices, and modernization portfolios. Everything was on the table."

Three possible budget scenarios considered by review, Hagel said.

• President Barack Obama's fiscal 2014 budget, which includes what he called "a carefully calibrated and largely back-loaded $150 billion reduction in defense spending over the next 10 years;"

• The Budget Control Act's sequester-level caps, which would cut another $52 billion from defense in fiscal 2014, with $500 billion in reductions for the department over the next 10 years; and

• An "in-between" scenario that would reduce defense spending by about $250 billion over the next 10 years, but would be largely back-loaded.

The secretary said senior leaders and staff members from his office, the Joint Staff, the services, the combatant commands and defense field activities all participated in the review, and all options were examined with four priorities in mind:

• Prioritizing DOD's missions and capabilities around its core responsibility of defending the nation;

• Maximizing the military's combat power by looking to reduce every other category of spending first;

• Preserving and strengthening military readiness; and,

• Honoring the service and sacrifice of DOD's people.

"Those principles, and a rigorous review process, resulted in packages of options that included management efficiencies and overhead reductions, compensation reforms, and changes to force structure and modernization plans," Hagel said.

The secretary noted that he and his immediate predecessors, Leon E. Panetta and Robert M. Gates, have created and implemented plans to cut headquarters structures.

"Not every proposal has generated the savings we expected or gained the support of Congress," he said, "most notably, our request for a base realignment and closure round."

New efficiencies pointed up during the review, he said, "should be pursued regardless of fiscal circumstances." These include:

• Reducing the department's major headquarters budgets by 20 percent, beginning with the office of the defense secretary, the Joint Staff, service headquarters and secretariats, combatant commands, and defense agencies and field activities.

"Although the 20 percent cut applies to budget dollars, organizations will strive for a goal of 20 percent reductions in government civilians and military personnel billets on headquarters staffs," Hagel said.

• Reducing the number of direct reports to the secretary by further consolidating functions within OSD and eliminating positions; and

• Reducing intelligence analysis and production at combatant command intelligence and operations centers, which also will foster closer integration and reduce duplication across the defense enterprise.

If department funding is subject to sequester-level caps over the long term, he said, other potential cuts could mean consolidation of regional combatant commands, defense agency mission cuts and further information technology consolidation.

"Even over the course of a decade, the cumulative savings of the most aggressive efficiency options identified by the review are $60 billion," Hagel said. "That is a very small fraction of what is needed under sequester-level cuts. We will have to look elsewhere for savings."

Pay and benefits for service members and defense civilians consume roughly half of the DOD budget, Hagel said. "If left unchecked, pay and benefits will continue to eat into readiness and modernization. That could result in a far less capable force that is well-compensated, but poorly trained and poorly equipped."

People are the department's most important asset, Hagel said.

"No one in uniform is overpaid for what they do for this country," he told reporters. Still, he added, "Overall personnel costs have risen dramatically -- some 40 percent above inflation since 2001. The department cannot afford to sustain this growth."

As with base realignments and closures, Congress has opposed some DOD proposals for cutting compensation costs, Hagel said. He said the department will need Congress' partnership to implement proposed measures that include:

• Changing military health care for retirees to increase use of private-sector insurance when available;

• Changing how the basic allowance for housing is calculated so individuals are asked to pay a little more of their housing costs;

• Reducing the overseas cost-of-living adjustment; and

• Continuing to limit military and civilian pay raises.

"I want to be clear that we are not announcing any compensation changes today," Hagel said. He added he has asked Army Gen. Martin E. Dempsey, chairman of the Joint Chiefs of Staff to lead an effort to identify $50 billion in compensation savings over 10 years, "and still enable us to recruit and retain a high-quality force."

Savings in headquarters staff and compensation still will leave DOD $350 billion to $400 billion short of the $500 billion in cuts sequestration requires over the next 10 years, he said.

"The review had to take a hard look at changes to our force structure and modernization plans," the secretary said.

With the goal of best supporting the president's defense strategy emphasizing strategic deterrence, homeland defense and the rebalance to the Asia-Pacific region, Hagel said, "the review concluded we should not take reductions proportionally across the military services." The review identified excess capacity to meet current and anticipated future defense needs, he said.

"In particular, the analysis concluded that we can strategically reduce the size of our ground and tactical air forces -- even beyond the current drawdown," Hagel said.

While no decisions have been made and more analysis is needed, he said, with one war over and another ending -- taking with them the need for large-scale counterinsurgency operations -- "it makes sense to take another look at the Army's force structure, which is currently planned to reach 490,000 in the active component and 555,000 in the reserves."