A new paper suggests that the Veterans’ Affairs Disability Compensation programme needs to be reformed
By C.W. | WASHINGTON, DC
IN THE 1990s American veterans were more likely to be in the labour force than non-veterans. By 2013, things had really changed. Three-quarters of male veterans aged between 18 and 64 were in the labour force, compared to four-fifths of male non-veterans of the same age. The difference in their employment rates was equally striking.
A new NBER paper looks at what happened, and why. It suggests that the Veterans’ Affairs Disability Compensation (VADC) programme, which pays benefits to veterans with disabilities, has a role to play. The three authors look at trends over time in the labour-force participation of veterans, and compare those to what non-veterans are doing. They then see whether the VADC programme can explain the differences.
Over time the American government has relaxed eligibility criteria for VADC (as they have for federal disability insurance). For instance, in 2001 scientists found evidence of a link between exposure to Agent Orange, a herbicide used during the Vietnam war, and diabetes. As a result, those with type-II diabetes became eligible for VADC.
First, the simple facts. The number of VADC beneficiaries boomed:
Share of veterans receiving disability-compensation benefits, 1950-2014
The rapid rise in VADC enrolment coincided with a big increase in the inflation-adjusted benefit: it grew by 46 percent from 2001 to 2013. By 2014 some veterans could get tax-free benefits of nearly $3,000 a month (which is roughly the same post-tax income as that of the second-poorest quintile of American households). No wonder, then, that VADC expenditures (in inflation-adjusted dollars) boomed, from $20 billion in 2000 to $54 billion in 2013. As the Economic Report of the President, released this morning, shows, that's roughly the amount of money that the Treasury gets from estate and gift taxes, as well as customs duties.
The economists do a series of regressions that estimate the effect of the VADC on the labour market. Let's focus on Vietnam veterans (explored in more detail by the authors in this new paper). Most Vietnam veterans were in their fifties in 2000-2004, so they expect the “Agent Orange decision” in 2001 to affect, among others, the 35-54 age group in 2000-2004 and the 55-64 age group in 2010-14.
That is indeed what they find. From 1980 to 1995, the participation rate of male veterans aged 35-54 was 1.2-1.9% higher than that of similarly aged non-veteran men. From 2000-2004, however, participation was 1.4% lower for the veterans in this age group. Veterans aged 55-64 were 7.8% less likely to participate in 2010-14. It seems that participation rates fell thanks to the "Agent Orange decision". In other words, more generous disability insurance made veterans less likely to be in the labour force.
This is a very interesting paper, but the economists do not really consider the question of reverse causality. It might have been the case that veterans’ labour-force participation was dropping for reasons other than changes in disability insurance. For instance, as medical care in the armed forces improved, people would be less likely to die on the battlefield, but might instead be left with debilitating conditions, such that working was impossible. Labour-force participation gradually fell for these reasons. The government might have responded by making veterans’ benefits more generous.
The weight of evidence, though, seems to be with the authors. One paper, from the cheerily titled "Journal of Anxiety Disorders", found that recent American wars "have produced historically low rates of fatalities, injuries, and post-traumatic stress disorder (PTSD)". Another medical paper suggested that "disability-compensation incentives influence the way some veterans report their symptoms when they are being evaluated for PTSD". So the reverse-causality argument may not be as convincing as it seems at first.
The big question, of course, is whether this is all bad. Lots of veterans have it pretty tough. The number of homeless veterans of the Vietnam war is greater than the number who died in it. I have some sympathy, in the abstract, with the idea that veterans should be paid a guaranteed basic income. But that is not going to happen. If the VADC really is stopping veterans getting into work (which would be good for them on several grounds) then it probably needs changing.
