By David Alexander and Phil Stewart
WASHINGTON (Reuters) - Defense Secretary Chuck Hagel warned the military to brace for more belt-tightening on Wednesday as he conducts a review that could cut the number of generals, pare back the civilian workforce and stem the spiraling cost of new weapons.
Hagel, in his first major policy speech as Pentagon chief, told students at the National Defense University that the United States could not allow its current budget crisis to force it to retreat from the world. But he underscored the limits of U.S. military power.
"We need to challenge all past assumptions, and we need to put everything on the table," Hagel said. "Any serious effort to reform and reshape our defense enterprise must confront the principal drivers of growth in the department's base budget - namely acquisitions, personnel costs and overhead."
Hagel's remarks come as the Pentagon is struggling to deal with a $41 billion budget cut that went into effect on March 1, part of a $500 billion reduction that could slice defense spending by $50 billion a year for the next decade.
His comments marked a shift in tone at the Pentagon, which for months harbored hope that Congress and the White House would rescue it from spending reductions beyond a $487 billion cut approved in 2011.
"The speech ... represented a bit of a turning point for the Pentagon because he acknowledged that further cuts in defense spending are likely, if not inevitable, and that DoD should begin preparing for them," said Todd Harrison, a defense analyst at the Center for Strategic and Budgetary Assessments think tank.
Hagel, a Vietnam veteran who took office in late February, faced pointed questions from his audience.
One woman asked why the department was moving ahead with a decision to put civilian employees on unpaid leave later this year, essentially slashing their pay by 20 percent for 14 weeks as part of its effort to cut spending.
"In case your advisers haven't told you, it is affecting morale," she said.
Questioned about how soon defense personnel might face reductions in benefits, Hagel said the military would fulfill commitments it had made so far. But he also said the Pentagon would ask for higher fees on some benefits like healthcare, a move Congress has rejected in the past.
He emphasized that the system ultimately would have to change.
'I WISH IT WAS OTHERWISE'
"If you play this out over a 10-, 20-year period, we're not going to be able to sustain the current personnel costs and retirement benefits. There will be no money in the budget for anything else," he said.
"I'm sorry. I wish it was otherwise," Hagel said. "But that's a fact of life and the longer we defer these things, the worse it's going to be for all of us."
He said the department had to come to grips with factors that are driving up long-term costs, like a big bureaucracy, high personnel costs and unwieldy weapons-development programs.
"In many respects, the biggest long-term fiscal challenge facing the department is not the flat or declining top-line budget, it is the growing imbalance in where the money is being spent internally," Hagel said.
He expressed concern that the military was looking at "systems that are vastly more expensive and technologically risky than what was promised or budgeted for" as it attempts to modernize weapons.
While recognizing the sacrifices of troops and their families over nearly a dozen years of war, Hagel said "fiscal realities demand" the Pentagon take another look at the number and mix of military and civilian personnel it employs.
"Despite good efforts and intentions, it is still not clear that every option has been exercised or considered to pare back the world's largest back-office," Hagel said, referring to the Pentagon's bureaucracy.
He said the military's hierarchies needed re-examination as well.
"Today the operational forces of the military - measured in battalions, ships and aircraft wings - have shrunk dramatically since the Cold War era," he said. "Yet the three- and four-star command and support structures sitting atop these smaller fighting forces have stayed intact, with minor exceptions, and in some cases they are actually increasing in size and rank."
(Editing by Philip Barbara and Xavier Briand)