2009/02/19 00:00:00
By Col. Steve Strobridge, USAF-Ret.
There’s no shortage of scandals these days, with athletes on steroids, bailed-out executives spending a million dollars to decorate their offices, and Ponzi scheme artists bilking gullible investors out of billions of dollars.
Military-oriented programs haven’t been exempt, as procurement managers and contractors can’t account for hundreds of millions of dollars in wartime spending, and payday-lending loan sharks have preyed on military families struggling to make ends meet.
In many cases, the government has risen up in righteous outrage to strike back. On the military people side, DoD and Congress worked hard to pass legislation to corral payday lenders who chisel servicemembers $500 to $5,000 at a time.
Unfortunately, they’re not as sensitive about their own roles in an even bigger scandal that, with every passing day, tacitly swindles more troops and families out of hundreds of thousands of dollars in future retirement benefits — the REDUX retirement system and its $30,000 “career status bonus.”
As background, Congress passed the REDUX system in 1986 as a means of cutting defense spending. REDUX cut retired pay for subsequent new service entrants to 40 percent (versus the previous 50 percent) of high three-year average basic pay at 20 years of service and reduced annual COLAs in retirement by 1 percent a year. REDUX retirees see a one-time “catch-up” increase at age 62, but then suffer the annual COLA caps for life.
Then-Secretary of Defense Caspar Weinberger warned Congress that REDUX would hurt retention, and it did. By 1999, the joint chiefs were urging Congress to fix it.
The fix Congress approved offers people who entered service on or after Aug. 1, 1986 (the REDUX effective date) a choice between reverting to the previous military retirement system or accepting a $30,000 “career status bonus” and staying with REDUX.
That “bonus” was a bad deal at the time, and it gets worse with every passing year as pay (and retired pay) increases.
After taxes, the so-called bonus is more like $22,000 or $23,000. And to get that, the typical NCO who retires with 20 years of service must agree to sacrifice more than $300,000 in future retired pay (those who live longer than average sacrifice far more). That’s how much less REDUX is worth compared to the normal system.
The deal is even worse for officer REDUX-takers, who get the same size bonus but sacrifice far more retired pay.
The harsh reality is that the REDUX law has put the military services in the position of “lifetime payday lenders” — unbounded by the consumer-protection rules required of other lenders, who must at least show the borrower the annualized APR on any loan.
And that’s what the REDUX “bonus” is — a loan against future retired pay, pure and simple. The government gives you $23,000 after taxes now, and you pay the government back a big chunk of your retired pay every month for as long as you live.
According to MOAA’s calculations, for an E-7 retiring with 20 years of service, it amounts to a 24-percent APR mortgage on retired pay. For an O-5 retiring with 20 years of service, it’s a 35-percent APR mortgage.
Nobody in his or her right mind would take out a mortgage like that on a home, car, or any other big-ticket item. Yet DoD offers this lifetime retired pay loan to military people as if it were a reasonable choice.
While take rates are down from what they were when the program first started at the beginning of this decade, 20 percent to 40 percent of enlisted troops still take the REDUX bonus, depending on service, with officer take rates somewhat lower.
Many service leaders rationalize that it’s the individual servicemember’s choice and that it saves the military money.
Excuse me? Let’s call it what it is: preying on the least-financially minded people — the very people who will need that money most in the future.
MOAA prefers the approach taken by Navy and Marine Corps; leaders of those services are blunt in telling their troops that taking the $30,000 is a bad deal. Unfortunately, the DoD Web site built to compare options offers no such advice and presents this as an investment choice.
But it’s no choice at all. It’s guaranteed inflation-protected income on one hand versus a grossly low-balled lump-sum that most takers end up spending.
If they think they have a prayer of making up the loss though investing, they’re sadly mistaken.
Who really expects to manage a 24-percent-to-35-percent annual return on an investment? Nobody.
And for those who did take the bonus and invest it in the stock market in the past few years, one hesitates to ask “How’s that working out for you?”
It’s time to end this scandal, get the military out of the sleazy “lifetime retired pay loan” business, and repeal REDUX and its grossly misnamed $30,000 “bonus.”
About the Author: Col. Steven P. Strobridge, USAF-Ret., joined MOAA’s Government Relations staff in 1994 and was appointed director of Government Relations and elected co-chair of The Military Coalition in March 2001.
Copyright Military Officers Association of America. All rights reserved.
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Colonel Mier |
3/11/2009 1:43:46 PM |
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Colonel Carroll |
3/7/2009 2:00:11 PM |
Please do anything possible to provide our soldiers with this information before they are required to make a choice. It is called transparancy.
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Colonel Clark |
3/7/2009 6:52:26 AM |
Excellent Article. More truthful and challenging information like this needs to come forth and we need to take action with the Administration and Congress to change. Redux, in whatever form, has always been a scam. BTW, civilian Federal Law Enforcement (people who carry a gun on duty) have a 20 year retirement at 50 percent of pay and I haven't heard anyone wanting to cut it. In the past 30 years, would you say your chances of being in harms way somewhere in the world would be greater in the military or in civilian law enforcement--where for most of their career they are home with their families each night?
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Major Ijadare |
3/5/2009 10:40:24 AM |
Excellent piece!
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Commander Morse |
2/28/2009 3:45:29 PM |
When it comes to handling big bucks,there are plenty crooked folks to help you lose yours. BZ
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Colonel Mugg |
2/28/2009 3:32:52 PM |
It's almost a contradiction in terms: why would we want a system that allows someone to serve long enough to earn retirement who was not smart enough to decline REDUX?
Somewhere along the line, we must start assuming individuals are responsible for the choices they make. As long as REDUX is not being "sold" to retirees through inaccurate or misleading propaganda, I'm agnostic on "repealing" it.
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Major Kent |
2/27/2009 9:14:33 PM |
I'm a retired Military Personnel Officer. If I was still on Active Duty and was required to brief the troops on this subject, I don't believe I could keep from telling the truth about this scam. It might cost me my commission but I could never force my self to mislead the troops in this fashion. When will someone stand up and say enough is enough.
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Lieutenant Williams |
2/27/2009 2:20:57 PM |
Thank you for the informtion. I am glad that I did not make this large mistake of taking the REDUX.
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Colonel LeRoy |
2/27/2009 12:15:25 PM |
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Chief Warrant Officer Fowler |
2/27/2009 10:13:56 AM |
