What if one of your people came to you with a contract for a $22,000 loan with these terms:
- No payments until retirement from active duty
- Upon retirement, you pay one-fifth of each pension check plus an amount equal to one percentage point of the annual cost-of-living allowance (COLA) until age 62
- After age 62, you pay an amount equal to one percentage point of the annual COLA until death
Surely you would tell the person to tear up such a terrible deal-and yet the U.S. government offers it to each active-duty service member at the 15-year mark. We can trace the roots of this odd situation back to the early 1980s, when military-retirement compensation, a huge part of each year's budget, was being reviewed in Congress.
Congressional goals were to try to keep folks in service for 30-year careers while also saving the government money. The result was the Military Retirement Reform Act of 1986, known as REDUX. It applied to everyone who entered service after 1986. The act revamped the retirement-pay structure, decreasing the 20-year multiplier from 50 to 40 percent. The increases per additional year of service changed to 3.5 instead of 2.5 percent, so an individual could still top out at 75 percent for a 30-year career.
The issue lay dormant until the late 1990s, when those under REDUX began to see the 20-year horizon and really think what it meant for their finances. A groundswell of opinion argued for REDUX to be eliminated, and service chiefs trooped to the Hill to weigh in with legislators. Throughout 1998 and 1999, then-Secretary of Defense William Cohen made eliminating REDUX one of his three goals of military pay reform. General Hugh Shelton, then Chairman of the Joint Chiefs of Staff, was blunt: "We want a retirement system that serves as an incentive for service, not a disincentive."
In the end the DOD leadership claimed success: The 1999 Authorization Act put every service member back under High 3 (a calculation applied to average basic pay for the highest 36 months of an individual's career). But Congress had not repealed the REDUX legislation-it had amended it. At the 15-year mark, each service member now had the option of taking a $30,000 Career Status Bonus (CSB). However, accepting the "bonus" required the individual to take the REDUX retirement plan and an added cut of 1 percent less in each COLA.
The numbers involved on the back end are awful. It is important to emphasize that the CSB is not a bonus. It is closer to the annuity buyback schemes against which the U.S. Department of Veterans Affairs often warns. The $30,000 is taxable, so the lump sum is actually about $22,000. But the amount of retirement pay that "bonus" recipients forfeit can reach hundreds of thousands of dollars. Even with adjustments like signing for the bonus in a combat zone so it becomes tax-free, or spreading payments over three years, the recipient still comes up very short.
And what help do folks get when making this decision? Not much. The onus is on each command to advise service members of their eligibility. The Office of the Secretary of Defense Web site has never been particularly informative about the CSB. Numerous financial advisers and organizations recommend against taking it, but since this is an official government program, there is not much wiggle room for services. Rather, the government's responsibility has been to implement it.
Participation has varied over the years. Initial "take rates" were up to 60 percent of those eligible, which has declined in recent years to around 25 percent. As the years go by, the CSB (a fixed amount in the legislation) continues to decline in value: $22,000 in 1999 is about $17,000 in today's dollars. But of course the decreased amount of retirement pay and the lost COLA, being percentages, will keep pace with inflation. This is another crucial factor.
If it is time for another discussion about decreasing military-retirement compensation, then we should have it. But this scheme of recouping 20 percent of service members' retirement pay should not continue. For as much as the DOD has done to educate folks about money and increase their pay and benefits, CSB/REDUX stands out as an enduring step backward. DOD leadership must again engage with Congress to repeal this legislation.