Why it makes sense to join the Reserve – even if you have to pay back your VSP: An analysis.
By John D. Turner
20 Jun 2007

Recently, there appeared an article in the Air Force Times regarding payback of the VSP (Variable Separation Pay). VSP is the money the Air Force is paying its Airmen to voluntarily leave military service during the current drawdown. Currently, if an Airman enters the reserve after taking VSP, they must pay back the entire amount if they stay in the reserve until retirement. As the article pointed out, this can be a large chunk of change for many. The article cited the example of a major having to pay back $169,500 once they started drawing their retirement check.

The article went on to say that many felt this to be unfair – and that the Air Force Reserve was considering waiving the requirement in order to lure many of these valuable assets back into uniform. Separating active force members are an invaluable resource for the reserve, as they come in already trained with years of experience under their belt.

It seems like a lot of money – and it is. So the question is, is it worth it to join the reserve, if you have to pay back all that money upon retirement. I would answer that by saying that everyone’s situation is different. However, a little analysis of the situation can go a long way to helping you determine a reasonable answer to that question.

I left active duty as a captain at the end of 1992, during the big drawdown we had at the end of the Cold War. I was offered a choice between SSB – a lump sum payment, and VSI – an annuity that paid me a fixed amount once a year for twice the number of years I had in active duty time. I chose the VSI because, although the annual amount was much smaller, over the entire life of the annuity it paid much more than did SSB. Like the current VSP, both of these programs required the entire amount to be paid back (even what was taken out in taxes that you never saw) if you went into the Reserve and stayed until retirement. In my case, I am on the hook for around $240,000.

So why have I stayed? Why should the hypothetical major, mentioned in the Air Force Times article (VSP payback hurts reserves’ appeal) consider the reserves when he or she would end up paying back nearly $169,500 upon retirement? A retirement that is not only likely to be less than they could earn on active duty, but which they will not start collecting until they are 60 years old? There are many reasons why one might choose the reserve, however lets just look at it from a monetary point of view, starting with that hypothetical major.

A little analysis shows that in order to receive the amount of VSP indicated in the example, he or she must have 12 years of active duty time. In the reserve, retirement is based on a combination of 20 “good” years service, and the number of “points” you have received during your career. Once you have reached 20 “good” years, you are eligible for retirement. The percentage of base pay you receive is not based on the number of years you served, as it is on active duty, but rather on the number of points you accumulated during your career. Each day you serve on active duty is worth one point. Each 4 hour inactive duty training period (IDT) you serve while in the reserve is also worth one point. There are other ways you can earn inactive duty training points as well, such as by doing PME, or even working for points only (no pay). Up to 90 such IDT points each year can be counted toward your eventual retirement.

In the reserve, 12 years of active duty time equate to 4380 retirement points. For the purposes of this example, we will suppose that this major joins the reserve stays an additional eight years, and retires with 20 years service. We will also assume they entered the service around age 22, so that would make them around 42 when they retire from the reserve. Unlike their active duty counterparts who begin receiving that retirement check immediately, our major will have to wait an additional 18 years to begin enjoying the fruits of his labors. However, if he decides to stay in the retired reserve, when he begins drawing that paycheck, he will do so based on the pay chart in effect on his 60th birthday, not the one in effect when he retires after 20 good years. This means he will have the benefit of an additional 18 years of active duty pay increases when he begins drawing that check. Staying in the retired reserve means he is subject to recall; however unless he resigns his commission, he is still subject to recall anyway. Also, he will be paid according to his total commissioned time. Thus, even though he retires at 20 years commissioned time, by the time he starts drawing the pay at age 60, he will be at the “over 26” column on the chart. (Although he will actually “max out” at the over 18 point).

The current base pay for an O-4 over 26 is $6,252.30 per month. Projecting an annual increase of 3% per year for the next 26 years, the base pay for an O-4 over 26 when he would begin being able to draw retirement pay would be around $13, 090.93. This may seem a bit outlandish to you, however 26 years ago, a maxed-out O-4’s base pay was only $2626.20. Projecting this amount at 3% per year from 1981 until today, we get $5498.68, which is considerably less than what an O-4 over 26 would actually receive today. The 3% per year raise is actually a fairly conservative number.

This assumes however that our hypothetical major remains a major. If he does his IDE however (and performs well in his assigned duties of course), his chances of making Lt Col are very good. Assuming he does so, his base pay upon retirement would be around $15,437.63 instead. Again, this is based on taking today’s base pay for a Lt Col over 26, and projecting it over the next 26 years at a 3% increase per year.

This is all well and good, but how much of this will actually show up in our good major’s retirement check? And what about all that dough he will have to pay back? Remember when I said that a reserve retirement check is based on points? Let’s take a look at a point projection next.

We will assume this potential reservist joins a unit program, since that is where most reservists go. If he does so, he can expect to earn at minimum, 48 points per year for his required IDTs and 15 points per year for his required annual tour. He will also receive 15 points a year just for being alive and in the program. This totals 78 points each year for his minimum requirements. Projected for the additional 8 years reserve time in this example, that totals an additional 628 points added to the 4380 points he had from his active duty time, for a grand total of 5004 points.

Of course, he could do additional points by doing additional work. Each additional man-day (which also counts as active duty time) nets him an additional point. And if the current world situation continues into the future, it is highly likely that he would end up doing additional time. If he were recalled for a year’s mobilization, for example, he would earn an additional 365 points for that time as well. And if he wanted to make Lt Col, and did his PME, he would get some points for that as well.

For purposes of this example, let’s just round the amount to 5000 points and continue from there.

As you know, an active duty retirement of 20 years gets you 50% of base pay in retirement (actually, 50% of your high three for most folks, but I am going to drop the high three part for simplification purposes). That 20 years of active service equates to 7300 points in reserve time. Thus, a reservist who manages to accrue 7300 points earns 50% of base pay in retirement, the same as an active duty member, except that it usually takes quite a bit longer to do, and you don’t get it until you are 60 years old. By contrast, in our example, the major retiring with 5000 points would earn a retirement of 34.25% of base pay.

Using the projected base pay numbers generated earlier, he would receive $4483.27/month as an O4, or $5,286.86 per month as an O5. Of course, he would also have to pay back that $169,500 the Air Force paid him to leave before he will get a full reserve paycheck. So how long will that take?

Assuming the payback formula is the same as the one I will have to use for my VSI, his retirement check will be reduced by the following formula:

(Total days served active duty before separation / total points accrued for retirement) * retired pay.

This is the amount of the recoupment. In this example, assuming retirement as a major, it would be (4380/5000) * 4483.27 = $3927.34 recouped from each retirement check until the debt was paid in full. Until the debt was settled, he would receive only $555.93 each month. It should be noted that the recoupment is made pre-tax; that is, he would only be taxed on the $555.93 he received each month, not the entire monthly amount of $4483.27.

Of course, if he retired as a Lt Col instead, he would pay $4631.29 each month, and receive $655.57 each month until the debt was paid.

And how long would it take to pay the debt? As a major it would take 3.6 years; as a Lt Col, 3.05 years. At worst, he would have it paid off and be receiving a full retirement check before he started drawing social security (assuming it is still around). Do I think it is worth it? You bet! The table below details some further examples. In all cases, retirement at 20 good years is assumed, with the member continuing in the retired reserve. Amounts are rounded to nearest dollar.

Rank YOS1 VSP Active Duty Points Total Retire Points % Base Pay Est Retire Rank Est Retire Check (Month) VSP Payback Net pay (Month) Years to Pay off VSP
O-2E2 6 $56,687 2190 3282 22.48 Maj $3,514 $2,345 $1,169 2.01
O-3E3 6 $66,269 2190 3282 22.48 Maj $3,514 $2,345 $1,169 2.36
O-3 6 $66,286 2190 3282 22.48 Maj $3,514 $2,345 $1,169 2.36
O-3 6 $66,286 2190 3282 22.48 Lt Col $4,144 $2,765 $1,379 2.00
O-3 8 $92,794 2920 3856 26.41 Maj $3,891 $2,947 $945 2.62
O-3 8 $92,794 2920 3856 26.41 Lt Col $4,589 $3,475 $1,114 2.23
O-4 10 $134,467 3650 4430 30.34 Maj $4,214 $3,472 $742 3.23
O-4 10 $134,467 3650 4430 30.34 Lt Col $4,969 $4,094 $875 2.74
O-4 12 $169,413 4380 5004 34.27 Maj $4,487 $3,927 $560 3.59
O-4 12 $169,413 4380 5004 34.27 Lt Col $5,291 $4,631 $660 3.05

1 Years of Service
2 Assume 4 years enlisted time, 2 years officer (just pinned on 1Lt)
3 Assume 2 years enlisted time, 4 years officer (just pinned on Capt). He can be selected for Lt Col in the time indicated, however he may have to do additional time past 20 good years to retire in grade, unless he is promoted early to Maj and Lt Col. Note: it would definitely be worth it to stay if selected!

As you can see, the payback time is longer for those receiving the most money. The reason for this is two-fold. First, they are receiving more so they have to pay back more. Second, they are older. They will hit their 60th birthday sooner, and thus be the recipients of fewer active duty pay increases between now and then to inflate their paychecks. And in reality, the payback period will be somewhat shorter, as your retired paycheck will increase by some COLA each year as well.

So, why join the reserve if you have to pay the money back? Easy! Spend or invest those bucks now, and pay them back down the road with inflated dollars in much less time than you would have thought possible, while enjoying that retired pay for the rest of your life. And the paychecks you receive along the way aren’t bad either. Think of it as the best paying second job you will ever find. How many part-time jobs come complete with a retirement check and medical benefits after retirement? And there are always opportunities in the reserve to pull active duty tours. This can come in very handy if you should find yourself between jobs in the future.

Logically, the issue should not be paying back the VSP money. If I were the reserve, I would spend more resources educating people on the actual reality of the payback, as I have outlined it here. Perhaps instead, congress could pass a law enabling reservists who chose VSP (and the VSI/SSB programs before them) to draw retired pay earlier. The start of the early retirement pay could coincide with how long it would take them to pay back their bonus money. Then, when they reached age 60, they would draw full retirement, same as everyone else.

Perhaps the reserve should relook at this. The active duty people I have talked to seem to be more worried about deployment issues. If the reserve wants to lure more people back, it should instead think about changing the deployment rules for Airmen leaving active duty and joining the reserve. As the rules stand now, their dwell time clock is wiped clean; they can be redeployed immediately even if they just came back from an active duty deployment before separating. This is hardly fair; they need some time to get their affairs in order and get settled in their new civilian job. At the least, they should have a year, preferably two or more, before they are subject to redeployment. Idealy, their active duty deployment would "carry over" to the reserve, where they would be subjected to the same 1:5 dwell as the rest of the reserve force.

Bottom line: If they offer to forgive my debt, I will, of course, accept. I would be a fool not to. However in reality, the payback isn't as bad as it seems; it certainly isn't a good enough reason, in and of itself, not to continue in the reserve and get a retirement.