The Career Status Bonus & Military REDUX Retirement Plan

The REDUX retirement plan and Career Status Bonus (CSB) retirement system ended on January 1, 2018, when the new Blended Retirement System (BRS) rolled out. Every military member who joined the service on or after January 1, 2018, was automatically enrolled in the BRS. Although REDUX Military Retirement is no longer an option, we left this article live as a reference for members currently benefiting from the plans.

What is the CSB/REDUX Retirement System?

The CSB/REDUX Retirement System was created by the Military Reform Act of 1986 and applied to all military members who joined on or after August 1, 1986, up until January 1, 2003. The system was designed to save the government money on military retirement pensions for the ever-growing number of retirees.

Service members who joined the military after August 1, 1986, and before January 1, 2003, were eligible to choose from one of two retirement plan options:

1. The High 36 retirement system (also called High-3)
2. The CSB/REDUX retirement option allowed eligible military members to receive a $30,000 Career Status Bonus when they achieved 15 years of service.

Both options were based on the same foundation: the average of the member’s highest 36 months of basic pay. However, each plan had its own wrinkles. Military members who elected to receive the CSB through REDUX also received a reduced pension and lower annual Cost of Living Adjustment (COLA) in retirement.

Under High-3, retired pay COLAs are given annually based on increases in the Consumer Price Index (CPI), a measure of inflation. Under REDUX, the COLA is equal to CPI minus 1%.

To close the reduced pension pay gap between the two retirement systems, retirees under REDUX receive an adjustment at age 62 to bring their retirement pay up to what it would have been under the High-3 retirement system. However, after that adjustment, the COLA remains at CPI minus 1%, and the gap begins to widen once again. Over a lifetime, the difference can easily reach hundreds of thousands of dollars, and for higher-ranking individuals, it can reach well into the millions.

The High-3 Average Retirement System

To see how REDUX military retirement differs, let’s compare it to the High-3 system. The High-3 Average Retirement System pays an average basic pay for the highest 36 months of the individual’s career. This system does not include a cash bonus, but base retirement pay and COLA accrue faster than under the CSB/REDUX plan.

COLAs are given annually based on the Consumer Price Index (CPI) increase; under the High-3, the annual COLA equals the CPI.

Which Military Retirement Plan is Better – CSB/REDUX or High-3?

Here is what a military pension looks like under the High-3 Average Retirement System in comparison to CSB/REDUX:

Service members who opted in receive the same percentage of their final pay with both High-3 and REDUX retirement plans.

However, you would have needed to serve 30 years under REDUX to receive the same total amount as you would have under High-3. This is because the CSB/REDUX plan includes a 1% penalty for each year under 30 years served. 

For example, a retiree who opted into High-3 and served 20 years would receive 50% (20 years x 2.5%) of the average basic pay for the highest 36 months of the individual’s career, plus 2.5% for each additional year served. 

On the other hand, the same retiree who opted into CSB/REDUX and served 20 years would receive 40% ((20 years x 2.5%)—(1% x 10 years)) of the average basic pay for the highest 36 months of the individual’s career, with an increase of 3.5% each additional year served.

The COLA percentage makes all the difference. On the surface, REDUX may come out ahead for a military member who stays 30 years, since they would receive 75% of their base pay and the $30,000 Career Retention Bonus. But it still fails to account for the reduced COLA, which is 1% lower. Think of it as settling for a 1% lower pay raise each year while your peers automatically receive a larger raise. 

Because raises are cumulative, it doesn’t take long for them to exceed the difference in the Career Retention Bonus (especially when you consider taxes). There is a one-time adjustment at age 62 to bring the cost of living in line with the non-REDUX option, but the rate remains at CPI-1%, and the gap widens again.

Was the REDUX Retirement Plan a Good Option if You Invested the Bonus?

This was a popular question when the REDUX retirement plan was still an option, and one I will answer with another question: Can you beat the stock market?

I don’t mean, “can you find a winning stock and turn a few hundred dollars?” Anyone can get lucky. I am asking whether you can consistently beat the stock market year after year for decades. Can you take that $30,000 bonus, deduct taxes (leaving you with just over $24,000, depending on your tax bracket), and turn it into hundreds of thousands of dollars?

That assumes you stay in the military for 30 years and max out your pension at 75%. If you retire at 20 years and receive a 40% pension, you will potentially need to turn the Career Retention Bonus into millions of dollars to make up the difference in lost earnings between the High-3 retirement plan and the REDUX option.

Taxes are Bigger Than You Think

Keep in mind that taxes are an important consideration when making these calculations. Unless you received the $30,000 lump-sum payment in a tax-free zone, you would have had to pay taxes on the $30,000 income you received, leaving you with much less than $30,000 to start investing.

In virtually every case, you would need to greatly exceed market returns to beat the difference between the REDUX and High-3 retirement systems. Then consider the taxes you’d pay on your investment earnings, since you won’t be able to shelter the entire $30,000 in retirement accounts.

Why Did the Government Offer REDUX Retirement?

The reason REDUX was offered is simple: It saved the government millions of dollars each year in reduced pension payments, and because military pensions often last decades, the potential annual savings can top hundreds of millions of dollars. If this wasn’t a good option for the government, they wouldn’t have offered it.

When was REDUX a good idea? REDUX made sense only in limited circumstances, but in most cases, the math didn’t work. 

Meet the Author

Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Tennessee Air...

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