Reduce VA’s Disability Benefits to Veterans Who Are Older Than the Full Retirement Age for Social Security

Background

In 2017, 4.5 million veterans with medical conditions or injuries that occurred or worsened during active-duty service received disability compensation from the Department of Veterans Affairs (VA). Service-connected disabilities vary widely in severity and type: Some examples are the loss of a limb, migraines, and hypertension. The amount of base compensation veterans receive depends on the severity of their disabilities (which are rated between zero and 100 percent in increments of 10). In calendar year 2018, base compensation rates generally ranged from $135 to $2,975 per month. Additional compensation may be awarded to veterans based on the number of their dependents and other factors. By law, VA's disability payments are intended to offset the average earnings that veterans would be expected to lose given the severity of their service-connected medical conditions or injuries, whether or not a particular veteran's condition actually reduced his or her earnings. Disability compensation is not means-tested: Veterans who work are eligible for benefits, and, in fact, most working-age veterans who receive such compensation are employed. (In contrast, Social Security Disability Insurance pays cash benefits to adults who are judged to be unable to perform "substantial" work because of a disability, and they eventually lose the benefits if they return to work and earn more than the program's limit on earnings—for most beneficiaries, $1,180 a month in calendar year 2018. Those Social Security disability benefits are based on previous earnings and usually replace wages and salaries on less than a one-to-one basis.)

Even after veterans reach full retirement age, VA's disability payments continue at the same level. By contrast, the income that people receive after they retire (from Social Security or private pensions) usually is less than their earnings from wages and salary before retirement. For instance, the ratio of benefits from Social Security to average lifetime earnings is usually much less than 1 to 1. For workers who have earned relatively low wages over their career, the ratio is around one-half; for higher-income workers, it is around one-quarter or less. As a consequence, once veterans reach retirement age, the combination of their VA disability payments and Social Security benefits may be more than the income of comparable veterans without a service-connected disability. In 2016, about 87 percent of veterans who received VA's disability compensation and who were age 67 or older were out of the labor market.

Option

Under this option, VA would reduce disability compensation payments to veterans by 30 percent at age 67 for all veterans who begin receiving those benefits after January 2020. (Social Security's full retirement age varies depending on beneficiaries' birth year; this option uses age 67, which is the full retirement age for people born after 1959.) Social Security and pension benefits would be unaffected by this option. Veterans who are already collecting disability compensation as of January 2020 would see no reduction in their VA disability benefits when they reach age 67.

Effects on the Budget

By the Congressional Budget Office's estimates, the savings from this option would be about $11 billion between 2020 and 2028. CBO estimates that the number of veterans age 67 and older who would no longer receive their full preretirement disability compensation from VA would increase from 60,000 in 2020 to about 470,000 in 2028. On average, veterans' benefit would be reduced by about $320 per month in 2020, increasing to a reduction of $385 per month in 2028.

The largest source of uncertainty in the estimate of savings over the next 10 years involves determining the number of new disability beneficiaries who will be 67 after January 2020. The number of veterans age 67 and older who receive disability compensation has increased in the past decade as Vietnam veterans have aged. CBO projects that the number of new recipients age 67 and older will decline in the coming years as the share of the veterans' population in that age group falls. However, the health of the veteran population also affects the number of older veterans on the rolls, as do outreach efforts by VA and others to inform veterans about the benefit and other factors.

Other Effects

Because earnings from wages and salaries typically decline when people retire, this option would better align veterans' benefits with the loss in income after retirement that is typical of the general population.

An argument against this option is that it would reduce the support available to disabled veterans. If they had been out of the workforce for a long time, their Social Security benefits might be small, and they might not have accumulated much personal savings. In addition, VA's disability payments may be considered compensation owed to veterans—particularly combat veterans—because they faced special risks and became disabled in the course of their military service.

The reduction in VA's disability benefit could affect older veterans' participation in the labor force and the age at which they would begin claiming Social Security benefits. This option might induce some older veterans with disabilities to remain in the labor force longer or work more hours than they would have under the current system in order to preserve their income; some veterans, however, would not be able to maintain employment that would accommodate their disabilities as they age.