Actually 5% adds up to a lot more over time. If your military is 5% more effective then the enemies, they have to put 105% the manpower you put in to be equivalent. In small conflicts that is not such a big deal. If you field 40 tanks, they would have to field 42 tanks. That is 240 extra shields. Add in the at least 100 mech Infantry vs their 105 mech infantry. That is 600 extra shields. 20 AAA vs 21 AAA. Another 100 shields. 80 artillery vs. 84 artillery is another 400 shields. 40 stealth bombers vs. 42 stealth bombers, that is 480 shields. 100 jet fighrters vs. 105 jet fighters, thats 600 shields. Thus, in a modern age conflict the difference could well be 240+600+100+400+480+600=2420 shields! That is a couple wonders or 4 ICBMs, or 8 tactical nukes, or 12 research facilities. You get the picture, efficiency would count for a lot in major conflicts, but not determine minor ones.
Also, I think experience should actually effect mroe then HP. Elites are usually trained on how to attack well, so they should get bonuses in attack and defense. Conscripts and Regulars tend to get chewed up a lot easier then Veterans. The current HP systme does not reflect that as well. I think their should be combat situations whihc are only acceptable for elite or veteran troops. Sending those below those levels would incur much heavier loses. An example would be breachinjg a city the first couple of attacks, or a hardened facilitiy. Also, heading intoa large stack, if they keep the one-at-a-time combat.