An Analysis of Military Disability Compensation

Disability payments for military personnel have received much attention recently, in part because of concern over the long-term economic consequences of injuries in Afghanistan and Iraq. This research reviews the goals and effectiveness of current policies for compensating veterans with military-related disabilities. It identifies trends in veterans’ disabilities, compares the military disability system with that used by civilian firms, and describes the effect of military disability on civilian labor market outcomes. The results show that military disability payments are adequate to offset most labor-market losses from military-related disabilities — many of the severely injured retirees receive substantially larger disability benefits than their estimated economic losses in the labor market. In addition, many retirees with a VA disability rating report no health or disability problem that limits their work in the civilian labor market. These findings suggest that the military disability rating system may no longer be valid. The system is based on the ability to perform physical tasks that may have limited effects on labor market success in today’s service- and knowledge-based economy. A more coherent and less complex system is needed to identify the criteria for measuring the economic loss from an injury and target payments to better reflect the economic consequences of a military-related disability.