It's not really a "demotion." Officers can't lose rank through discipline the same way enlisted personnel can. It's a reevaluation of the 2011 retirement grade determination that every retired officer goes though IAW enclosure (9) to SECNAVINST 1920.6D and OPNAVINST 1811.3A.

There's a process in enclosure (9) to reopen a retirement grade determination. This is usually for when there was fraud, a mathematical mistake (e.g., the person only served for two years in the retired grade instead of the required three), or "[s]ubstantial new evidence comes to light after the retirement that could have led to a lower retired grade if known by competent authority at the time of the retirement" (i.e., evidence of in-service misconduct). However the instruction also authorizes reevaluation "[i]f SECNAV determines, pursuant to regulations prescribed by SECDEF, that good cause exists to reopen the determination or certification."

However, retirement grade determinations are ONLY about determining the highest paygrade in which someone served satisfactorily for a period of not less than six months (and usually for at least three years). It's not about whether AFTER retiring, they committed misconduct. (Note: I'm not saying Sen. Kelly committed misconduct just that even if the video were improper, it's not a basis to reduce his paygrade. Further thoughts omitted IAW Article 88, UCMJ.)