Military now offers a choice of pension plans

The Defense Department will allow careerists who elect to transfer to the Redux retirement plan next year to delay acceptance of the plan’s $30,000 bonus so they can shelter a portion of the payment from taxes using the military’s new thrift savings plan.

Starting in August, more than 800 officers and 3,000 enlisted members each month will reach 15 years of service and face a critical choice: stay under the High-3 retirement plan, which pays 50 percent of base pay after 20 years of service with full cost-of-living adjustments, or shift to Redux, which will provide lower annuities and less inflation protection but will deliver an immediate $30,000 "career status bonus."

Over time, almost all careerists who first entered service on or after Aug. 1, 1986, will face the same choice. Those who don’t elect Redux will stay under High-3, said Tom Tower of the Office of the Secretary of Defense. The decision will be irrevocable.

Officials now can only guess at the percentage of careerists who will be enticed by the cash at 15 years in return for reduced retirement pay later and a commitment to serve five more years. Tower said his early estimate is that 40 to 50 percent will shift to Redux.

The $30,000 becomes more attractive if members can shelter a large portion of it, up to $10,500 under current law, in a tax-deferred thrift savings plan. And that explains the new policy decision by Defense officials to ensure that roughly 20,000 members offered Redux from August through December next year can use a thrift savings plan to protect the value of the bonus.

The problem they face is that the establishment of individual accounts to accept payroll deductions and bonuses will not begin until Jan. 1, 2002. By then, more than 4000 officers and 15,000 enlisted members will have been offered the $30,000, with no thrift savings plan available to shelter any of it.

To avoid such an arbitrary penalty, Defense officials have decided to allow careerists who elect Redux at their 15-year mark to delay accepting the bonus for up to 60 days after a military thrift savings plan begins accepting deposits. If the current start-up schedule holds for thrift savings plans, careerists who reach 15 years on or after Aug. 1, 2001, will be able to delay acceptance of their Redux bonus until March 1, 2002.

Tower said the policy will save the typical enlisted careerist at least a few thousand dollars in taxes and will save officers, who generally are in a higher tax bracket, a little more. "If that money goes into the thrift plan, and it builds tax-deferred earnings that compound over the years, it’s quite a bit of difference," said Tower.

For months, the services have been checking data banks to identify personnel who first entered service after July 31, 1986, and to verify, given occasional breaks in service, when they will complete 15 years. The first wave will do so Aug. 1. Six months before that date, that is, by Feb. 1, 2001, the first group of careerists to pick their own retirement plan will be mailed information packets for doing so.

Not every member at 15 years will be offered the bonus, Tower cautioned. The services won’t pay it, for example, to people who have earned rank so slowly they face separation short of 20 years for violating "high-year tenure" rules. The bonus also won’t be offered to people whose performance or misconduct makes discharge or even imprisonment more likely than military retirement.

Bonus takers will have to commit to completing at least 20 years. The government plans to recoup any bonuses not earned, with amounts determined by how close members came to completing 20 years. For instance, a member who leaves after 18 years would have served only three years, or 60 percent, of the five-year obligation. So the government would go after 40 percent of the $30,000, or $12,000.

For those who will have the choice, their decisions will be shaped largely by individual circumstances. But officials generally expect most enlisted and lower-ranked officers to favor Redux, while officers, with their higher salaries, will pass on the $30,000 bonus and determine they are better off, long term, under High-3.

Each service will decide how much financial counseling to provide, Tower said. The information packet will describe the choice as complicated and will urge careerists to seek financial advice before making their decision.

"We will describe as much of the options as we can," said Tower, "but obviously we don’t know all the possible uses of $30,000."

He encourages visits to a Web site set up to explain the retirement options.

There, careerists will find a software program that, when they plug in rank, age at retirement and other information and assumptions, will calculate the lifetime value of benefits under Redux and High-3. The Web address is: pay2000.dtic.milc.

Given these tools and information still to come, Tower said, careerists should be able "to make a knowledgeable decision. We’ll do all we can to see that they do."