Fear 'redux bonus' not scary headlines

August 25, 2011 

Military careerists have been spun up this month by sensational headlines and news bulletins about a plan to "slash" their retirement, citing a "Pentagon study."

The study, which I described in more muted tones in a column in late July, was done by the Defense Business Board, a group of independent business executives that advises the secretary of defense from time to time on ways to streamline department organizations and programs.

For example, five years ago it urged consolidation of the Army, Navy and Air Force medical commands into a single joint command. That hasn't happened. In recent years the business board also has pressed for substantial Tricare fee increases. That hasn't happened either.

The retirement report, still a draft, proposes replacing the current 20-year defined retirement plan with a 401(k)-like pension that would grow though annual government contributions equal to as much as 16.5 percent of military basic pay. The idea is that more service members would leave after only a tour or two with portable retirement benefits, and yet the total cost to the government would fall sharply, along with lifetime benefits for careerists.

Despite overheated headlines, no Department of Defense leader -- civilian or military -- has embraced this alternative pension system. Before he left office in July, then-Defense Secretary Robert Gates did call for retirement reform. But Gates said any changes are likely to "grandfather," or protect, the current force. Adm. Mike Mullen, chairman of the Joint Chiefs, seconded that view recently, saying retirement changes have to be implemented with care and should not break faith with current members.

The new defense chief, Leon Panetta, also has weighed in. To an audience at the National Defense University on Fort McNair, Washington, D.C., Panetta said retirement reform must be done "in a way that doesn't break faith with our troops and with their families. If you're going to do something like this, you've got to think very seriously about grandfathering in order to protect the benefits that are there."

So, while it took longer than it should have, defense leaders have quashed the notion of cutting retirement benefits for the only segment of America that has sacrificed dearly since the Sept. 11, 2001, terrorist attacks, fighting two wars and being buffeted by an ungodly pace of operations.

That's not to say, however, that retirement dollars aren't at risk. Congress could agree, for example, to dampen the formula for setting annual cost-of-living adjustments for all federal entitlement programs, as described here in an earlier column. Amid the current debt crisis, Congress could also make military retirement less generous for future generations of service members without fear of "breaking faith" with the current force.

Finally, retirement dollars might be put at risk if any "reform" plan has features to entice current members to switch voluntarily to a less valuable plan. The effectiveness of that tactic is seen in how the current "Career Status Bonus" or Redux bonus operates.

Every month hundreds of careerists in their 15th year of service are enticed to slash the value of their own retirement. They do so by accepting an immediate $30,000 bonus in return for making an irrevocable decision to move under the cheaper Redux plan.

How that choice downgrades the lifetime value of military retirement has been updated by the think tank CNA in its report, "Retirement Choice: 2011." The self-inflicted drop in lifetime retired pay, CNA estimates, is now as high as $375,000 for a 38-year-old E-7 who retires after 20 years, assuming the retiree lives until age 79.

The report authors, led by Dr. Aline Quester, CNA's vice president and director for resource analysis, have tried for years to educate members, particularly in the Marine Corps, which commissions the study, on the poor choice made by shifting to Redux.

At the urging of the Joint Chiefs, Congress in 2001 repealed the Redux retirement plan under which members fell if they entered service in 1986 or later. The cheaper benefit, the chiefs argued, was impacting force retention as the Redux generation neared career decision points.

With repeal, Congress came up with a fresh cost-cutting scheme: allow careerists to opt back into Redux in their 15th year by offering a $30,000 bonus. It is tax exempt if accepted while serving in a war zone. Otherwise, taxes for a typical enlisted member lower the bonus' worth to about $25,500. Officers in higher tax brackets see a bigger tax bite.

Bonus-takers are shifted from High-3 retirement to Redux, and soon feel the difference. After 20 years' service, High-3 pays an immediate annuity equal to 50 percent of average basic pay over a member's highest three income years. Redux pays 40 percent. The disparity narrows for each year served beyond 20 so that those who serve 30 years under Redux get the same annuity, 75 percent of basic pay, as colleagues under High-3.

But retired pay under the High-3 plan is fully protected from inflation. Redux cost-of-living adjustments are set a full percentage point below inflation. At age 62, Redux annuitants get a one-time catch-up raise so, for a year, their retired pay matches that of High-3 peers. But then cost-of-living-adjustment caps resume through old age with no more catch-up raises to recover lost purchasing power.

"We find that, for almost all service members, the Redux retirement plan (with bonus) is a bad choice that significantly reduces their retirement income," CNA reports. "The higher the grade (and) the lower the years of service at retirement and the longer the service member lives, the greater the reduction."

The financial penalty for taking the bonus grows every year because the bonus loses more value to inflation. It hasn't been adjusted since set 10 years ago. Retiree advocates don't want it raised, hoping that fewer and fewer careerists will take it. The Marine Corps has lowered its enlisted "take rate" to 15 percent. That's still high considering the financial penalty inflicted, and take rates have been higher for the other services.

That's the retirement "report" careerists should worry about.

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