Oct 10, 2005
Military and civilian systems have different philosophies about compensation, but both face substantial program growth. Severely disabled military retirees receive disability payments that are much larger than their civilian earnings losses. However, most disabled retirees have less serious injuries that have little effect on their civilian work and earnings. Finally, the system itself is unduly complex, which is likely to confuse and frustrate both veterans and policymakers.
Disability compensation for military members has received much attention of late. First, there is concern about whether those injured in Afghanistan and Iraq are receiving adequate compensation. There is also concern about the impact of changes in the law that eliminate the offset between retired pay and disability compensation for those with a disability ranked over 50 percent and 20 years of service. And more generally, there is concern about whether the military disability system has adjusted to the opportunities available today to disabled veterans, given advances in medical technology and changes in the nature of the workplace.
To address these concerns, RAND researchers reviewed the goals and effectiveness of current policies for compensating veterans with service-connected disabilities. In particular, they compared the military's disability system with that used by civilian firms; identified trends in veterans' disabilities; and described the effects of military disability on civilian labor market outcomes. Researchers built statistical models to compare the labor market outcomes of disabled and nondisabled retirees, relying on data on 32,804 retirees from the 2003 Survey of Retired Military (SRM) conducted by the Defense Manpower Data Center (DMDC). The SRM includes civilian earnings information on nonmedical and medical military retirees with a service-connected disability. Nonmedical retirees generally complete a military career of 20 or more years to qualify for retirement and receive disability payments for service-connected injuries. Medical retirees are granted early retirement benefits if a Physical Evaluation Board determines that a service-connected disability does not allow them to perform their military duties. The SRM does not include information on other veterans with service-connected disabilities who are ineligible for retirement benefits.
Military and civilian disability programs differ in fundamental ways. Civilian programs focus on replacing a portion of workers' earnings because they cannot work while recovering from an injury. In contrast, the military continues members' full pay and benefits if they cannot work. If the member cannot return to duty, he or she is discharged with a military retirement or a disability severance. Civilian programs replace earnings; military programs supplement earnings under the assumption that those earnings are depressed as a result of the disability. The military system is notably more generous than the civilian system in paying for short-term work loss.
Disability rates are rising rapidly, so programs in both sectors can expect substantial growth. The increase for military retirees was 22 percentage points between the 1971 cohort and the 2001 cohort (35 percent to 57 percent). Because military disability compensation continues for life, the higher rates in recent cohorts will translate into higher expenditures. A key issue is why military disability rates are rising across cohorts.
We find that disabled retirees are less likely to work, work fewer weeks per year, and earn less than their counterparts without disabilities. The magnitude of these differences depends on two factors. First, the gaps are large for those with severe disabilities but not for those with disabilities rated at 50 percent or less—about 71 percent of disabled retirees. (Disabilities are rated on a scale from 10 to 100 percent.) Second, the earnings losses are sensitive to the assumptions made about why retirees work either less or not at all; losses are overestimates if all reduced participation is attributed to disability-related causes.
When researchers compared earnings loss under a variety of assumptions, they found that disability compensation is adequate. Results from the earnings models show that the Veteran Affairs (VA) disability compensation schedule payment is systematically higher than the earnings loss for every rating—from 10 to 100 percent.
But the story is more complicated if the focus is on how much extra income the retiree receives. The value of the VA payment is affected by an offset with retired pay, the tax-exempt status of the receipt, and the phasing-in of concurrent receipt (which establishes separate retirement and disability payments for those with disability ratings of 50 percent or greater). With these adjustments, full-time workers with disabilities of less than 50 percent have net earnings losses of about 1 percent. In contrast, full-time workers with more severe injuries have net earnings gains of 16 to 70 percent compared with similar nondisabled retirees.
The Department of Defense (DoD) and the VA evaluate injuries by somewhat different criteria. Also, the compensation associated with a service-connected disability is based on a combination of military retired pay, the VA disability compensation schedule, and the offset of military retired pay. These complexities make it hard to assess how a disability rating translates into a specific incremental monthly income, which is likely to confuse and frustrate both veterans and policymakers.
A key issue for all disability systems is how to assess the validity of the current method of determining disability. Both military and civilian systems are rooted in the history of medical decisions about workplaces that differ greatly from those retirees find today. Also, many retirees assigned VA disability ratings report that they have no health- or disability-related limitations on their civilian-sector work.
DoD should consider the following actions: