Is Military Disability Compensation Adequate to Offset Civilian Earnings Losses from Service-Connected Disabilities?

by Richard Buddin, Bing Han

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Research Questions

  1. How do civilian labor force participation and earnings vary with service-connected disability (SCD) rating?
  2. Are earnings losses larger for some groups of veterans than for others?
  3. Do earnings losses differ for those in the Defense Department and Veterans Affairs compensation programs?
  4. How do these civilian earnings losses vary over time?

The Departments of Defense and Veterans' Affairs (DoD and VA) pay about $35 billion in disability compensation to about 3.2 million veterans each year. Their disabilities range from battlefield injuries to health conditions like diabetes and asthma. This research examines the adequacy of disability compensation to offset the reduction in civilian earnings opportunities that are associated with service-connected disabilities (SCDs). The authors focus on cohorts of veterans who left active military service between fiscal year (FY) 1993 and FY 2004. They track these veterans' civilian earnings and labor force participation for up to 12 years, from 1994 through 2005, compare the labor-market success of veterans with and without SCDs, and recommend changes to disability compensation.

Key Findings

Disability Compensation for Veterans with Service-Connected Disabilities (SCDs) Exceeds the Average Earnings Losses for Most Veterans

  • The loss in civilian earnings for veterans with SCDs is more than offset by the size of disability payments, the tax-free status of those payments, and the availability of concurrent receipt for nondisability retirees with ratings of 50 percent or greater.
  • The disability payments associated with the Veterans Affairs Schedule of Rated Disabilities are generally higher than the actual earnings losses for each rating level and across most types of veterans.

But Some Veterans Suffer Civilian Financial Losses from Their SCD

  • Some veterans with medical separations fare worse than others with comparable ratings.
  • Disability payments are proportionately less generous for former officers than for former enlisted members.
  • Veterans with disability separations from active duty have much lower earnings than do comparable other veterans with the same rating.

Recommendations

  • Congress and program managers should better define the goals and objectives of disability compensation.
  • Ratings should reflect changes in modern medicine and the limitations of service-connected disabilities (SCDs) in the current labor market.
  • Defense Department payments for disability separations should target the earnings disruption and loss of military retirement opportunities associated with unexpected separation from active duty.
  • Disability compensation for SCDs should be left entirely to the Department of Veterans Affairs.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Background on Disability Compensation Programs

  • Chapter Three

    Measuring Earnings Losses

  • Chapter Four

    Results

  • Chapter Five

    Conclusions

  • Appendix A

    Model Averaging

  • Appendix B

    Primary Regression Results

  • Appendix C

    Examination of How SCD Affects Transition to Civilian Employment

  • Appendix D

    Examination of SCD Cohort Effects

  • Appendix E

    Examination of How Trends in Veteran Ratings Affect Civilian Employment

The research described in this report was prepared for the Office of the Secretary of Defense (OSD). The research was conducted within the RAND National Defense Research Institute, a federally funded research and development center sponsored by OSD, the Joint Staff, the Unified Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

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