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Redux Bonus: Bad Deal Gets Worse
$30,000 'Redux' Bonus: Bad Deal Only Gets Worse
Thousands of military members entering their 15th year of service continue to be enticed by a wily government offer: a $30,000 bonus if they agree to take a deep and permanent cut in future retirement benefits.
The offer, called a Career Status Bonus, takes advantage of service people who are in financial distress, or easily lured by cash-in-hand, or who fail to grasp the amount of retirement dollars forfeited over their lifetime.
"This is an extremely bad choice for virtually all service members unless they believe they will not live long after they retire," says Dr. Aline Quester, a manpower analyst with CNA, a government think tank.
"There must be a better way for people to get money other than to assume this reduction in retirement," nearly $350,000 for some enlisted.
Quester, acting vice president at CNA who was team leader on Marine Corps manpower studies, has been urging careerists for years not to accept the bonus which is tied to a reduced retirement plan called Redux. She had done so through an annual report that describes the amount of retired pay they will forfeit, and through slide presentations to groups of career Marines.
While the bonus has been frozen at $30,000 since it was introduced in 2001, individuals who take it today forfeit, on average, nearly $100,000 more in lifetime retired pay than bonus takers did seven years ago, Quester said. She attributes that to a string of above-average basic pay raises that have boosted the relative value of the High-3 retirement plan, which bonus takers turn down, compared to Redux, which they accept.
The disparity between plans is based on the annuity formula and level of inflation protection. For a 20-year career, High-3 pays an annuity equal to 50 percent of average basic pay over the member's three highest income years. Redux pays only 40 percent for a 20-year retiree.
Also, while High-3 fully protects annuities from inflation, with annual cost-of-living adjustments, under Redux COLAs are set a full percentage point below the inflation rate. It provides a one-time catch-up in purchasing power at age 62, but then capped COLAs continue until death.
Retirees under Redux see the annuity gap narrow by a percentage point for each year they serve beyond 20, so that, for 30 years of service, both plans pay 75 percent of basic pay. But most members don't serve 30-year careers, and there is no full relief from the Redux COLA cap.
Bonus takers who believe they can invest their $30,000 wisely enough to offset any deep loss in retirement income, with help perhaps of their tax deferred Thrift Savings Plan, are just fooling themselves, Quester said.
"The amount you would have to earn to break even is astronomical," she said. "No one could earn it."
CNA has set up a retirement calculator on its website that will show members the difference in lifetime retirement under Redux versus High-3, and the return rate needed on invested bonuses to make up the difference. The link is: www.cna.org/nationalsecurity/rad/retirementcalc.aspx
The government's goal in offering the CRB/Redux combination is to save hundreds of millions of dollars a year in future retirement obligations. It works well but at service members' expense. Indeed, it might be argued that no payday lender outside a military base ever ripped off a member as severely as the government has done with this bonus offer.
Those who accept the $30,000, Quester said, in effect are taking out a loan that sharply lowers their retirement. But it's a loan that can't be paid off, which makes it worse than inflated interest rate loans of payday lenders.
"There is no way you can pay this loan back early and get it off your back," she said. "You're essentially paying it back until you die. So if you live to be 100, you're going to pay it back until you're 100."
Though the bonus offer is discreditable, service officials are obligated by law to present it to members during their 15 year of service. Once the election is made, and the 15th year completed, the retirement choice is irrevocable. Those who take the bonus bait typically seek to pay off debts, buy a new car or a boat, put money down on a home and, more often recently, avoid home foreclosures. The trade off in future income is huge.
Consider a typical enlisted member taking a $30,000 bonus that, after taxes, is worth $25,500. If the member retires at 20 years as an E-7 and age 38, the lifetime retirement loss is $344,400, Quester said, or 13 times the value of the bonus. If the bonus is paid in a war zone, and thus tax exempt, the value of lost retired pay falls to about 11 times the bonus value.
Despite that disparity, 42 percent of Marine staff sergeants and 32 percent of gunnery sergeants still take the bonus and accept Redux retirement. Less than six percent of Marine officers make that choice.
Those who elect the bonus are obligated to serve at least until 20 years or they must repay the bonus.
CSB/Redux "take rates" for some services were not immediately available. Quester fears that a steady decline in bonus takers since 2001 might level off because of higher gas and food prices and diminished home equity. The Navy reports that 24 percent of enlisted sailors are taking the bonus this year, down from 27 percent last year. Officer takes rates are up slightly but remain below 5 percent.
Quester likes to remind Marines who have home mortgages that, on signing those contracts, they saw that over 30 years they typically will pay the mortgage lender two-and-a-half times the loan's value. In accepting the Redux bonus, she said, careerists typically agree "to pay back 12 times the amount of money they borrowed," whether they know it or not.
Quester opposes raising the $30,000 bonus. That only would entice more service members to take the deal, which would still be bad, she said.