Posted on: Monday, April 30, 2001

Military Update
Pentagon to offer bonus for returning to Redux

By Tom Philpott

Military Update focuses on issues affecting pay, benefits and lifestyle of active and retired servicepeople. Its author, Tom Philpott, is a Virginia-based syndicated columnist and freelance writer. He has covered military issues for almost 25 years, including six years as editor of Navy Times. For 17 years he worked as a writer and senior editor for Army Times Publishing Co. Philpott, 49, enlisted in the U.S. Coast Guard in 1973 and served as an information officer from 1974-77.

If history is a guide, most military careerists who reach the 15-year mark after July 31 will accept an immediate $30,000 bonus and, in return, switch their retirement plan back to the so-called Redux system. By taking the cash, they will be cutting future annuities sharply, particularly if they are 20-year retirees.

Pentagon pay officials don't call it a sucker play, not outright; after all, some careerists do have financial needs that fiscal discipline alone can't address. But the coupling of Redux with a cash bonus will save the government billions of dollars in retirement costs.

Those who grab for the cash often are responding emotionally to economic stimuli, and thus cutting their own lifetime benefits. Even warned about it, many members will take the quick cash.

Two years ago, Congress did a huge favor for military careerists who first entered service on or after Aug. 1, 1986. It moved them from the original Redux retirement plan to the much more valuable High-3 plan. For members who complete 20 years, High-3 pays an annuity equal to 50 percent of average basic pay over the member's three highest-pay years.

Redux pays only 40 percent after 20 years. High-3 also provides full inflation protection on annuities; Redux sets annual cost-of-living adjustments a full percentage point below inflation, with a one time "catch up" in lost purchasing power at age 62.

To reduce the cost of this massive shift to High-3, however, Congress stole a lesson from the post-Cold War drawdown experience and decided to offer a lump sum at 15 years to entice members to shift back to the cheaper retirement plan.

A lump-sum bonus proved remarkably effective in reducing costs during the drawdown of the early 1990s, when careerists in over-populated skills and ranks were offered a choice of two financial incentives to leave voluntarily. The Selective Separation Bonus was a lump-sum amount equal to 15 percent of a member's annual basic pay multiplied by number of years served. The other option was an annuity, the Voluntary Separation Incentive, set at 2.5 percent of annual basic pay multiplied by number of years in service. VSI would be paid for double the number of years the member spent on active duty.

Because the "present value" of the VSI annuity was about double that of the SSB cash bonus, economists had predicted that only half of 54,000 eligible enlisted and very few, if any, of 11,000 eligible officers would take the lump sum. They were very wrong. Indeed, more than half of the officers and more than 90 percent of enlisted personnel choose SSB.

That offer of SSB in lieu of the annuity saved the government $1.7 billion in separation costs, according to a pair of economists who report on the phenomena in the March issue of The American Economic Review.

With the Redux bonus, as with SSB years ago, economic models suggest members should turn it down if to maximize retirement benefits.

But most — 70 to 90 percent of enlisted, and 50 to 70 percent of officers — likely will take it anyway, predicts Patrick Mackin, an economist with SAG Corp., consultants on military pay issues. He notes that the bonus-enhanced Redux is being offered at 15 years of service, "a time in people's lives when a substantial chunk of money like that can come in very handy, either to pay for college or to buy a house."

Pay officials are arming careerists with a variety of tools to make the decision easier, including a Web site — http://pay2000.dtic.mil — where they can compare the value of both plans.