Do You Really Need An Allotment?
Starting in January 2015, active-duty servicemembers can no longer take out allotments to buy or rent “personal property”: vehicles, furniture, electronics, appliances or recreational gear. If you have an existing allotment in place before 1 January, then that allotment will continue until you stop it.
The new rule only applies to active-duty servicemembers. Retirees can continue to take out allotments for personal property and all the other purposes of the system.
The Department of Defense is so serious about this new policy that when you start a new allotment, you’ll have to certify that it’s not for personal property. The new rules will be quoted to you on myPay, and if you ignore them then you’ll be subject to UCMJ. DoD and the Defense Finance Accounting System will not be screening allotments accounts for violations, but if you have trouble with the vendor or your finances then your command could certainly get involved.
You can still take out allotments for savings or investment accounts, savings bonds, supporting relatives or former spouses, paying insurance premiums, and paying mortgages or rent. You can still take out allotments to donate to the Combined Federal Campaign, to repay loans to military relief societies, and to pay off delinquent official travel cards.
You can still give someone a special power of attorney to change your allotments, but they have to follow the same rules that you’re subject to.
Why in the world would DoD get so involved in our allotment decisions? Why are they behaving like government nannies and fretting over our spending?
The allotment system is changing because a few servicemembers have made bad financial choices, and the resulting adverse publicity has taken a lot of military time and effort to handle. Federal financial regulators have encouraged DoD to remove one of the sources of the problems. If DoD did not take the initiative, the financial regulators would have gotten even more involved.
I’m not going to rehash all of the allotment problems here, but the latest miscreant to make the news was USA Discounters. The company sells furniture, electronics, jewelry, and appliances near large military bases across the nation. Servicemembers were encouraged to pay for their purchases by taking out an allotment. If there was any dispute about the payment (or if the servicemember fell behind) then USA Discounters would obtain a legal judgment against them in Virginia and garnish their pay. (Ironically one of the executives of USA Discounters was a retired Navy officer.) The chain was popular among servicemembers because they didn’t need any credit– they were paying by allotment.
The Consumer Financial Protection Bureau accused USA Discounters of unfair and deceptive practices, and the company agreed to stop charging some of their fees. They refunded those fees and paid a civil penalty, but they’re still free to continue selling high-priced personal property to servicemembers. They were also still free to encouraging them to pay with allotments. The company has since changed their name and continues to obtain judgments against servicemembers who fall behind on their payments. It’s just one of several companies that have settled with the CFPB.
Meanwhile Congress has asked the Federal Trade Commission to investigate the situation. The FTC has already sued payday lenders that base their business on Native American tribal lands and do not follow the requirements of the Servicemembers Civil Relief Act. Once again, the FTC would be investigating how servicemembers and allotments were involved in purchases and loans. I’m sure that more and more of DoD’s time was taken up with questions about the allotment process, and one proposed option was scrapping the entire allotment system.
Which brings me back to the title of this post: why would you need an allotment in the first place?
Allotments may have been a big help during the last millennium when electronic fund transfers were not easily available to us retail customers, and money had to be moved by wire or paper checks in the postal mail.
Maybe they’re useful to people who are “unbanked” without a checking or savings account. Yet today, every military recruit has to have a checking account before they even show up at recruit training. (Ask your local recruiter about the hassles of getting teens signed up for a checking account.) When they turn 18 years old, they can access a full range of money-management services over the Internet– even overseas. Utility bills, services, mortgages, other loans, and credit-card payments can all be handled from a checking account and easily changed by servicemembers through a website or a phone call.
Does any other major U.S. corporation offer allotments to their civilian employees? People can designate paycheck transfers to tax-deferred accounts like 401(k), but that’s for tax reasons. Employees can pay health insurance premiums out of their paycheck, but again that’s just as much for tax reasons as for employer-sponsored healthcare. The rest of an employee’s paid compensation can be direct-deposited in their checking account, just like every other servicemember.
On the “corporate” side of the allotment system, I wonder how much it costs DFAS to run the hardware, update the software, and deal with hackers. (Can you imagine having your paycheck hacked by an allotment diverting your pay to an account in a third-world country?) Is there any practical or business reason to have allotments? When I was in uniform, I chose to pay my life insurance and family dental care insurance premiums via allotment. However in retirement, I pay my Tricare premiums via a monthly deduction from my checking account or with my credit card. If there’s a glitch in my credit union’s payments, I can quickly sort out the problem without risking a loss of benefits or coverage.
The federal government will keep an allotment system in place for Thrift Savings Plan deductions and savings programs. Allotments are essential for paying life insurance or survivor benefit program premiums. The services will keep allotments for adjusting military pay (especially for nonjudicial punishment). I think that allotments are a big help in divorce agreements, especially for child support or dividing a pension. DFAS can be a trusted neutral party in the process of calculating how much money is due under the divorce agreement or the court order, especially when the specific amount changes every year after a cost-of-living adjustment or a pension offset for veteran’s disability benefits. Allotments are probably greatly appreciated by all of the non-profit corporations and charities that are a part of the Combined Federal Campaign.
However allotments for consumer personal-property purchases are “extra labor” for DFAS without a military purpose. If we had to pay DFAS for their expenses of setting up allotments for consumer purchases, then we’d all be outraged at the military taking money from our paychecks.
Allotments for personal-property purchases also work against servicemembers. It’s much easier to dispute a credit-card payment with a retailer than it is to change or stop an allotment. Merchants want to stay on the good side of credit-card companies, so they’ll treat servicemembers better when they pay with a credit card. Servicemembers with good credit have at least as much warranty and service protection when they pay with cash or a credit card instead of an allotment. Disreputable retailers will find it hard to add on “processing fees” and “legal defense” fees for payments with credit cards or cash.
Servicemembers with poor credit will have to resort to secured credit cards or even– wait for it– paying with cash. Perhaps servicemembers with poor credit will build good credit faster if every consumer purchase has to be done with cash or a debit card. That can also help avoid the temptation of just signing up for an allotment.
Retirees beware: you’re on your own with pension allotments, but unscrupulous lenders are still preying on us. They’ll offer to “buy your pension” or “give you a lump-sum payment” if you take out an allotment to pay them back. The problem is that the interest rate is ridiculously high and they go to great lengths to operate at the very limits of federal law. While their business may be legal in some situations, their interest rates (and their fees) are unethical. If you’re considering one of these firms for credit then you have serious debt problems that are better handled through free consumer credit counseling.
Allotments still have a purpose in the military’s pay and benefits system, but an allotment for purchasing personal property is an outmoded payment system that should have been dropped long ago. I hope the new policy helps servicemembers make better budget decisions, and perhaps it will reduce the workload on the chain of command and the military relief societies.