Just when you think you’ve written about everything in military personal finance, someone asks a new question about an old topic.
If you’re still in uniform, here’s a cautionary tale. If you’re a veteran of a certain age, let’s take a stroll down Memory Lane and learn about paybacks. The dollar version of paybacks, not the karma.
Bottom line up front: when someone gives you a financial incentive to sign up for their program, make sure you ask the “What if…?” questions and understand the fine print. Consider how you’ll feel about your decision years or even decades later.
A Reader Writes:
My friend just retired from the Reserves. Back in the 1990s she was given $120K to leave active duty and join the Reserves. She’s now being told that she has to pay back that $120K. She’s still a few years away from her pension (at age 60) so for now they’re deducting payments from her VA disability compensation. I didn’t think the military could do that. Any ideas?
We’ve seen this before. She was paid to leave active duty, but now that she’s earned her Reserve pension the Department of Defense wants their money back. If there’s any good news here, it’s that DoD has easy repayment terms with zero interest or penalties.
Here’s The History:
In the 1990s after “winning” the Cold War, the U.S. military reduced our active-duty forces by over 25%. It was the largest drawdown since WWII.
Instead of simply stopping 1990s enlistments (which 10-15 years later would leave a big hole in the leadership ranks), the Department of Defense started by throttling back on new enlistments. They also paid more senior servicemembers to separate from the mid-grade ranks (at least six years of service). DoD even encouraged people to retire as early as 15 years instead of 20, for a substantial reduction in their pension calculation– but still with a full Cost Of Living Adjustment and full military benefits.
The three programs of the Temporary Early Retirement Authority, the Voluntary Separation Incentive, and the Special Separation Benefit ran from 1992-1995 for just about everyone who met the minimum requirements. Additional special situations were approved all the way up until… 9/11/2001. Three decades later these dates are gaining new relevance, and I’ll come back to that point later.
Executing The U.S. Military’s 1990s Drawdown
In 1992 I had just reached 10 years of active duty and rotated to shore duty at a submarine operations staff. I had a front-row seat to the 1990s drawdown process (and its consequences). I watched these programs roll out in real time, and I applied for one of them several times.
A hard slog for not promoting.
The first group to be “paid” to leave was mid-grade officers (O-4s) who had failed to promote to O-5 at about 15 years of service. During the 1980s personnel shortages (a perpetual problem in the submarine officer community), most of these members had been allowed to continue on active duty “until eligible to retire”, which meant 20 years of service.
When TERA authorized retirement at 15-18 years, though, all submarine O-4s in that range who had not been selected for O-5 (and for all I know, the rest of the military’s O-4s who’d failed to promote) were notified that they were retiring in six months– and at a much smaller TERA pension. No exceptions, no waivers. Military families had made implicit long-term plans based on years of history, and that all changed overnight.
I have not heard of a successful TERA lawsuit to let someone continue to 20 years. Even worse, the six-month deadline meant that officers disappeared from shore duty months before their reliefs arrived– including a few critical members of our staff. Like every drawdown, the extra workload pain was shared among the remaining staff members.
After DoD harvested the TERA low-hanging fruit, they rolled out VSI and SSB. As the names imply, these programs were voluntary– but volunteering also came with unexpected long-term consequences.
The Voluntary Separation Incentive is a term-certain annuity:
[2.5% of annual base pay] x [years of service], paid out for twice as long as the YOS.
The Special Separation Benefit is a lump sum:
[15% of annual base pay x YOS].
Every VSI or SSB applicant had to be approved by their commanding officer. Unfortunately, at the peak of the drawdown, every command was under heavy pressure to do more with less by “rightsizing.” COs were frequently overruled and rarely succeeded in keeping anyone who wanted to separate.
The details in the VSI & SSB contracts clarified that the money was taxable income. The Defense Finance and Accounting Service withheld 20% of the amount for estimated income-tax payments, although some of that money might be refunded later when the tax return was filed.
In addition, everyone who took VSI had to affiliate with the Reserves. They didn’t have to drill or go on active duty, let alone mobilize, but if they voluntarily left the Reserves later then their VSI was terminated.
The fine print: anyone who took VSI or SSB and eventually (somehow) qualified for any sort of military pension had to pay back their VSI or SSB. We’re returning to that point in a few paragraphs, too.
In the 1990s, everyone who separated from the military was technically required to attend a transition seminar of 3-5 days. The agenda explained our military & veterans benefits along with the basics of starting a bridge career. VSI & SSB probably got one-hour presentations on the details, but explaining that fine print during a very busy transition is like trying to teach a semester of financial literacy during a combat readiness inspection. The fine print is not exactly your highest priority with everything else happening at a chaotic time in your life.
VSI & SSB quickly cleared out the marginal performers who already wanted to leave. The unintended consequence was that too many high-performance people also left to make their fortunes from the World Wide Web. (Yeah, today nobody’s surprised to read that, but in the early 1990s our senior leadership didn’t see it coming.) As our shipmates went on terminal leave, I also remember seeing a lot of new high-end vehicles peeling SSB rubber out of the parking lot. Nobody looked back.
Meanwhile, after my TERA requests were disapproved, I gutted it out to 20 and retired in 2002.
Decades Later:
In 2011 I started marketing my book about military financial independence. Along with the usual FI questions, I was blindsided with a ton of questions about VSI & SSB. Today I’m getting a resurgence of these queries, and that’s why you’re reading this (keyword-rich) blog post.
It turns out that some people earned VSI for so many years (and of course stayed in the Reserves too) that they’d become eligible to receive Reserve pensions. At age 60 when they happily applied to start those pensions, they discovered that retirees who’d received VSI were subject to recoupment. Even worse, they learned that DFAS would recoup the entire amount– not just the after-tax dollars they’d actually been able to invest (or spend).
By federal law, DoD claws back up to 40% of their pensions and even 40% of their VA disability compensation until the gross VSI sum is repaid. Yes, veterans got an interest-free loan for many years. (And paid back a sum that had been eroded by years of inflation.) Yes, it was in the fine print. Yes, the clawbacks are totally legal.
These retirees had paid income taxes on their VSI (if required), and many of them had made long-term assumptions about their military pensions without accounting for recoupment. Some had also been receiving VA disability compensation (perhaps for decades) and the recoupment suddenly gored a big hole in their cash flow.
In other cases, after 9/11 a significant minority of the VSI & SSB veterans voluntarily returned to active duty. Now older and more experienced, they were challenged & fulfilled to serve that higher calling. (A few returned after losing their civilian jobs during the Internet Recession, perhaps no longer able to afford the operating expenses of a high-end vehicle.) A number of these members became eligible for active-duty pensions. Again, VSI & SSB clawbacks.
I heard from one retiree’s family while he was in the hospital recovering from more surgery on injuries received in Afghanistan. His VA disability rating was 100% Permanent & Total, but DoD was also deducting 40% of every deposit to recoup something that the retiree barely remembered doing in the 1990s– and none of their family understood. He eventually received a DoD financial-hardship approval to continue the clawback at a lower rate… for one year… before it resumed at 40%.
Sea story:
In the 1990s I didn’t apply for VSI or SSB because (at the time) I was totally (and unhappily) ignorant about Reserve pay & benefits. Even though I worked with several outstanding Reservists during my years of submarine service, the Reserves had a poor reputation among active-duty service members. (In retrospect, this trope was ludicrously untrue.) Senior active-duty officers (also in retrospect, at least as ignorant as me) discouraged the whole idea of “going Weekend Warrior.”
In 1996 I finally applied for TERA, and was promptly declined because I was still a few months short of 15 years. I applied twice more in 1997 (each time that TERA was offered to submariners) but was still disapproved. At the third disapproval I was informed that the submarine force had (ironically) already cut too deep at my rank– and I was discouraged from submitting further requests.
By this time my career had derailed from the typical submarine career flowchart and I served the rest of my active duty at training commands. In a final ironic twist, I failed to select for promotion to O-5 and was continued on active duty “until eligible to retire.” (I was now cynical about that phrase, and we stayed financially ready for me to abruptly retire with only six months’ warning.) After 9/11, as we mobilized the submarine force for a new war, I was quietly (and unofficially) informed that I could extend on active duty.
By then my spouse was a drilling Reservist, and despite the Internet Recession we were also still (barely) financially independent. We were very concerned that she would be mobilized and deployed, so I declined my active-duty offer and made sure that our nine-year-old daughter had at least one parent at home.
In another unintended consequence of the drawdown, new officers who joined the submarine force in 1996 had one of the Navy’s highest rates of selection to command since WWII… mainly because not many of them were selected for the community in ‘96, and by 2010 there were so few of them who elected to stay.
Even in 2024 I’m hearing the same story about submarine officers in the yeargroups of 2010-2012. The retention issues never seem to change.
Call To Action:
If you’ve taken VSI or SSB and you’re eligible for a military pension (active duty or Reserve), then please review those links and assess the recoupment impact on your finances. Contact me if you have questions about the process or the math.
If you’re paying back your VSI or SSB from your VA disability compensation or your military pension, take a look at the reference links in the paragraphs about clawbacks and hardship. We can’t stop the clawback, but you can at least calculate when you’ll finish the recoupment– or learn how to obtain a year of hardship relief at a lower rate.
There are no affiliate links or paid ads in this post. Try your military base library or local public library before you pay money for these books– in any format.
Military Financial Independence on Amazon:
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Raising Your Money-Savvy Family on Amazon:
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Related articles:
DFAS description of TERA
DFAS explanation of VSI, including the Reserve service obligation
DFAS explanation of SSB
Don’t Gut It Out To 20
The Financial Management Regulation (DoD 7000.14-R) on hardship payback applications (this link opens a PDF)
Military Financial Independence 