Rethinking federal policy for America’s veterans

When President Biden tapped Denis McDonough last month to lead the Department of Veterans Affairs (VA), the former White House chief of staff promised to “fight like hell to give our veterans and their families the health care, respect and dignity they deserve.”

As he gears up for his confirmation hearing this week, at the top of his list should be serious reform of the VA’s Disability Compensation program.

This program has become the locomotive driving the agency’s budget, which has grown from $71 billion in 2000 (in 2020 dollars) to $243 billion this year despite a 30 percent decline in the veteran population (from 26.4 million to 18.0 million) since 2000. After remaining roughly constant at about 9 percent from 1950 to 2000, the fraction of America’s veterans receiving service-connected disability benefits has risen steadily since, reaching 25 percent in late 2019. And this growth shows no sign of slowing down. 

To determine how much a veteran receives for a service-connected disability, he or she is assigned a combined disability rating between 10 percent and 100 percent based on the severity of their impairments. The typical recipient has more than one condition and the two most common are tinnitus (ringing in ear) and hearing loss. Disability benefits are not taxable and currently range from $1,730 per year for a 10 percent rating to $37,800 per year for a 100 percent rating (benefits are adjusted up by inflation each year).

In 2000 the Institute of Medicine found suggestive evidence that exposure to Agent Orange, a herbicide used by the U.S. military to defoliate trees during the Vietnam War, was associated with an elevated risk of diabetes. In response, the VA secretary in July 2001 expanded the definition of disability for veterans who had served in the Vietnam theater so that any diabetes case was presumptively service-connected. The number of service-disabled veterans with diabetes quickly surged so that by 2004 it was the most common condition among Vietnam-era benefit recipients.

In the subsequent 20 years, the VA has steadily expanded their disability policies to categorize several other health conditions as “presumptive” for Vietnam-era veterans along with veterans of the more recent conflicts in Afghanistan and Iraq. Our recent research (with Courtney Coile at Wellesley College) shows that these changes are the primary reason that the fraction of veterans receiving service-connected disability benefits has approximately tripled since 2000. And this increase had the likely unintended consequence of substantially reducing employment among veterans.

During that same 20-year period, the number of beneficiaries with the highest disability ratings (70 percent or more) soared while the corresponding number with low ratings (10 or 20 percent) was virtually unchanged. This shift has to a large extent been driven by a benefit “escalator,” as many veterans initially awarded low ratings (and thus low monthly benefits) later qualify for rating increases due to worsening or previously uncovered conditions. As a result, the average annual benefit for disability recipients has increased by 75 percent, from $9,700 in 2000 to $17,200 in 2019.

With more veterans using VA health care due to Disability Compensation recipients’ prioritized access, the agency’s medical spending per veteran has also surged, from $930 in 2000 to $4,600 by 2020. It is therefore not surprising that the VA’s health care resources have been so strained recently despite a much smaller veteran population.

The rise in veterans’ Disability Compensation (DC) enrollment and corresponding increase in VA health care utilization explain why the VA’s budget has more than tripled since 2000.  During this period, the annual (real) growth rate of the VA budget has been three times greater than the corresponding growth rate for the Department of Defense budget (6 percent versus 2 percent). As a result of this change, VA spending per veteran has risen from less than $3,000 (in 2000) to more than $12,000 in the current fiscal year.

A potentially promising reform would instead grant all veterans a modest unconditional cash benefit based on their years of service (with higher amounts for those who served in combat and/or with the most severe disabilities). This could motivate more of our younger veterans to continue working, alleviate the administrative burden of processing DC applications and lead to faster and more efficient delivery of benefits to those who need them most.  

Additionally, a substantial wage subsidy modeled after the earned income tax credit for service-disabled veterans could incentivize their return to work and encourage them to remain in the labor force (as this tax credit has done for workers more generally). 

Except for the recent expansions in medical eligibility described above, the Disability Compensation program has essentially been on autopilot for more than 100 years since the conclusion of World War I. We have learned lessons in the century since about how to better structure government programs to protect those who need assistance while enhancing work incentives for others.

The confirmation of a new VA secretary along with a new VA leadership team provides our nation with an excellent opportunity to embark on an ambitious reform effort that will allow us to more effectively serve America’s 18 million veterans and their families.

Mark Duggan is director of the Stanford Institute for Economic Policy Research (SIEPR). Audrey Guo is an assistant professor of economics at Santa Clara University’s Leavey School of Business.