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CBO Options for Reducing the Deficit: 2019 to 2028 Published Dec 2018

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CBO Budget Cuts

 

Mandatory Spending Options

Option 34: Narrow Eligibility for Veterans’ Disability Compensation by Excluding Certain Disabilities Unrelated to Military Duties

CBO 001

Background

Veterans may receive disability compensation from the Department of Veterans Affairs (VA) for medical conditions or injuries that occurred or worsened during active duty military service. Such service-connected disabilities range widely in severity and type, from migraines and treatable hypertension to the loss of limbs. VA also provides dependency and indemnity compensation (DIC)— payments to surviving spouses or children of a Veteran who died from a service-related injury or disease. The Department of Defense (DoD) has a separate compensation system for service members who can no longer fulfill‌ their military duties because of a disability.

Not all service-connected medical conditions and injuries are incurred or exacerbated in the performance of military duties. For example, a qualifying injury could occur when a service member was at home or on leave, and a qualifying medical condition, such as Parkinson’s disease, could develop independently of a service member’s military duties. In 2017, VA paid a total of $2.7 billion, the Congressional Budget Office (CBO) estimates, to compensate for seven medical conditions that, according to the Government Accountability Office (GAO), military service is unlikely to cause or aggravate. Those conditions are arteriosclerotic heart disease, chronic obstructive pulmonary disease, Crohn’s disease, hemorrhoids, multiple sclerosis, osteoarthritis, and uterine fibroids. There were‌ 758,085 instances of those conditions in 2017.

Disabilities being considered as not a qualifying injury for compensation.

Option

Beginning in January 2020, this option would cease‌ Veterans’ disability compensation for the seven medical conditions GAO identified. Under the option’s first alternative, Veterans now receiving compensation for those conditions would have their compensation reduced or eliminated, and Veterans who applied for compensation for those conditions in the future would not be eligible for it. The second alternative would affect only new applicants for disability compensation. The option would not alter DoD’s disability compensation system.

Effects on the Budget

By CBO’s estimates, the savings from the first alternative, in which VA would no longer make payments to all Veterans for the seven medical conditions, would be $33 billion between 2020 and 2028. Most of the savings would result from curtailing payments to current recipients of disability compensation. In 2020, VA would no longer provide compensation for about 846,000 cases of those seven conditions, CBO estimates. That number would rise to 976,000 cases in 2028. (The number of Veterans affected by the option would be fewer than the number of cases because some Veterans would have more than one of the seven conditions.) In addition, CBO estimates that Veterans’ loss of eligibility for the seven conditions would result in fewer cases of DIC. The option would result in about 1,200 fewer of those cases in 2028, CBO estimates.

Savings from the second alternative, in which only new applicants for disability compensation would be ineligible to receive payments for the seven conditions, would be about $4 billion over the 2020–2028 period, CBO estimates. The number of cases for which VA would not provide compensation would increase from 15,000 in 2020 to approximately 225,000 by 2028.

The largest source of uncertainty in estimating the savings from this option is the estimate of the population receiving benefit payments for each of the seven conditions. CBO projects the number of Veterans receiving payments for those conditions on the basis of historical information on the number of Veterans receiving a disability rating for such conditions, the growth of the overall disability compensation program, the mortality rate of the disability compensation population, and other factors. Savings per Veteran are estimated by calculating the average rating and payment for each of the seven conditions and reducing the Veteran’s payment by a corresponding amount.

Other Effects

An argument in support of this option is that it would make the disability compensation system for military Veterans more comparable to civilian systems. Few civilian employers offer long-term disability benefits, and among those that do, benefits do not typically compensate individuals for all medical problems that developed during employment.

An argument against this option is that Veterans’ compensation could be viewed as a lifetime indemnification the federal government owes to people who become disabled to any degree during service in the armed forces.

Option 35: End VA’s Individual Unemployability Payments to Disabled Veterans at the Full Retirement Age for Social Security

CBO 002

Background

In 2017, 4.5 million Veterans with medical conditions‌or injuries that were incurred or that worsened during active-duty service received disability compensation from the Department of Veterans Affairs (VA). The amount of compensation such Veterans receive depends on the severity of their disabilities (which are rated between zero and 100 percent in increments of 10), the number of their dependents, and other factors—but not on their income or civilian employment history.

In addition, VA may increase certain Veterans’ disability compensation to the 100 percent level, even though VA has not rated their service-connected disabilities at that level. To receive the supplement, termed an Individual Unemployability (IU) payment, disabled Veterans must apply for the benefit and meet two criteria. First, Veterans generally must be rated between 60 percent and 90 percent disabled. Second, VA must determine that Veterans’ disabilities prevent them from maintaining substantially gainful employment—for instance, if their employment earnings would keep them below the poverty threshold for one person. In 2017, for Veterans who received the supplement, it boosted their monthly VA disability payment by an average of about $1,200. In September 2017, about 380,000 Veterans received IU payments. Of those Veterans, the Congressional Budget Office estimates, about 180,000 were age 67 or older. That age group has‌ been the largest driver of growth in the program.

In addition, VA may increase certain Veterans’ disability compensation to the 100 percent level, even though VA has not rated their service-connected disabilities at that level. To receive the supplement, termed an Individual Unemployability (IU) payment, disabled Veterans must apply for the benefit and meet two criteria. First, Veterans generally must be rated between 60 percent and 90 percent disabled. Second, VA must determine that Veterans’ disabilities prevent them from maintaining substantially gainful employment — for instance, if their employment earnings would keep them below the poverty threshold for one person. In 2017, for Veterans who received the supplement, it boosted their monthly VA disability payment by an average of about $1,200. In September 2017, about 380,000 Veterans received IU payments. Of those Veterans, the Congressional Budget Office estimates, about 180,000 were age 67 or older. That age group has‌ been the largest driver of growth in the program.

Option

This option consists of two alternatives, both beginning in January 2020. Under the first alternative, VA would stop making IU payments to Veterans age 67 or older (the full retirement age for Social Security benefits for those born after 1959). That restriction would apply to both current and prospective recipients. Therefore, at age 67, VA disability payments would revert to the amount‌ associated with the rated disability level.

Under the second alternative, Veterans who begin receiving the IU supplement after January 2020 would no longer receive those payments once they reach age 67.‌

In addition, no new applicants who are age 67 or older would be eligible for IU benefits after that date. Unlike under the first alternative, Veterans who are already receiving IU payments and are age 67 or older after the effective date of the option would continue to collect the IU supplement.

Effects on the Budget

By CBO’s estimates, the savings from the first alternative, in which Veterans age 67 or older may no longer collect the IU supplement, would be $48 billion between 2020 and 2028. That reduction in spending is the result of a decrease in the number of Veterans who would qualify for the supplement. CBO estimates that the number of Veterans who would no longer receive or qualify for the IU supplement would total nearly 235,000 in 2020. That number would increase to 382,000 Veterans in 2028, with savings totaling $7 billion in that year. Disability payments for those who lost eligibility would be reduced by an average of $1,300 per month in 2020, increasing to $1,600 by 2028.

The savings from the second alternative, which would end IU payments to new recipients and bar applications from Veterans who are age 67 or older after the effective date of the option, would total $7 billion between 2020 and 2028. The number of Veterans who would not collect IU payments under this alternative grows from 8,300 in 2020 to 83,000 in 2028. The savings from this alternative equal $2 billion in that final year of the projection period.

CBO projects the number of Veterans receiving the IU supplement on the basis of past growth in the number of new recipients (by age) and adjusts that number to account for the morbidity of beneficiaries and other factors, such as the backlog of disability cases to be decided. For IU recipients who would no longer receive the supplement under this option, CBO determines per-Veteran savings by reducing the payment amount to a level that corresponds to the Veteran’s overall disability rating.

CBO estimates that rating on the basis of historical data on IU recipients and anticipated changes in the distribution of their ratings. The largest sources of uncertainty in the estimate of savings over the next 10 years are CBO’s estimates of the number of participants who would be affected by the option and of the disability ratings of those affected. Changes in policy, such as increased efforts by VA and private organizations to inform Veterans about this benefit or the level of assistance given by those entities in developing a claim, may affect the number of applicants with fully developed claims, and consequently contribute to uncertainty regarding the savings from this option.

Other Effects

One argument for this option is that most Veterans older than Social Security’s full retirement age would not be in the labor force because of their age, so their lack of earnings would probably not be attributable to service-connected disabilities. In 2017, about 35 percent of men ages 65 to 69 were in the labor force; for men age 75 or older, that number dropped to about 10 percent. In addition, most recipients of IU payments who are older than 65 would have other sources of income: They would continue to receive regular VA disability payments and might also collect Social Security benefits. (Recipients of the IU supplement typically begin collecting it in their 60s and probably have worked enough in prior years to earn Social Security benefits.)

An argument for retaining the current policy is that IU payments should be determined solely on the basis of a Veteran’s ability to work due to his or her disabilities and that age should not be a factor in deciding a claim. In addition, replacing the income from the IU supplement would be hard or impossible for some 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 in personal savings.

Option 36: Reduce VA’s Disability Benefits to Veterans Who Are Older Than the Full Retirement Age for Social Security

CBO 003

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 rep ace 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.

Option 37: Narrow Eligibility for VA’s Disability Compensation by Excluding Veterans with Low Disability Ratings

CBO 004

Background‌

In 2017, 4.5 million Veterans with medical conditions or injuries that were incurred or that worsened during active-duty service received disability compensation from the Department of Veterans Affairs (VA). Such

service-connected disabilities range widely in severity and type, from migraines and treatable hypertension to the loss of limbs. The base amount of compensation Veterans receive depends on the severity of their disabilities, which are rated between zero and 100 percent in increments of 10; a 100 percent rating means that Veterans are considered totally disabled and probably unable to support themselves financially. The most common rating is 10 percent. In 2018, base compensation rates generally ranged from about $140 to $3,000 per month. Additional compensation may be awarded based on the presence of dependents and other factors. The amount of compensation is intended to offset the average amount of income Veterans lose as a result of the severity of their service-connected medical conditions or injuries.

Option

Under this option’s first alternative, VA would narrow eligibility for compensation to Veterans with disability ratings of 30 percent or higher. The second alternative would impose the same limits on eligibility, but it would only affect new applicants for disability compensation.

Effects on the Budget

By the Congressional Budget Office’s estimates, the savings from the first alternative, in which current and future recipients would be ineligible for payments for disability ratings of less than 30 percent, would be $38 billion over the 2020–2028 period. In 2017, about 1.3 million Veterans received compensation for a rating of less than 30 percent. Under current law, that number is projected to rise to 1.5 million in 2020 and then to 1.9 million by 2028. Under the first alternative, VA would discontinue compensation for those Veterans.

Savings from the second alternative, in which VA would no longer make payments for future cases in which Veterans’ disability rating was less than 30 percent, would be $6 billion between 2020 and 2028. The number of Veterans who would no longer qualify for compensation under this alternative would be small at first but would rise to 500,000 by 2028.

Additional savings would be possible if eligibility was further limited to Veterans with disability ratings higher than 30 percent. However, the amount saved would not be proportional to the level of the disability rating, because neither payment amounts nor the beneficiary population increase at the same rate as their associated disability ratings.

The largest source of uncertainty in estimating the savings from this option is the future size of the population with disability ratings of less than 30 percent. CBO projects that number based on the number of Veterans who received such disability ratings in the past, the growth of the overall disability compensation program, the mortality rate of Veterans receiving disability compensation, and other factors.

Other Effects

One argument for this change is that it would permit VA to concentrate spending on Veterans with the greatest impairments. Furthermore, there may be less need than in the past to compensate Veterans with milder impairments. Many civilian jobs now depend less on physical labor than was the case in 1917, when the disability-rating system was first devised; the rating system that is the basis for current payments has not undergone major revisions since 1945. In addition, medical care and rehabilitation technologies have made great progress. Thus, a physical limitation rated below 30 percent might not substantively reduce a Veteran’s earning capability, because it would not preclude work in many modern occupations.

An argument against this option is that Veterans’ compensation could be viewed as a lifetime indemnification the federal government owes to people who become disabled to any degree during service in the armed forces.

Discretionary Spending Options

Option 30: End Enrollment in VA Medical Care for Veterans in Priority Groups 7 and 8

CBO 005

Background

The Department of Veterans Affairs (VA) offers a wide range of medical care to Veterans, including providing inpatient and outpatient care, filling prescriptions, and offering assistive devices to Veterans. That care is provided at little or no charge to enrolled Veterans. Veterans who seek medical care from VA are assigned to one of eight priority groups on the basis of disability status and income, among other factors. For example, enrollees in priority groups 1, 2, and 3 generally have service-connected disabilities (as determined by VA), and their income does not affect eligibility for VA medical care. Veterans in priority group 7 do not have service-connected disabilities, and their annual income is above a national threshold (about $32,000 for a household of one in 2017) set by VA but below a (generally higher) geographically adjusted threshold.

Those in priority group 8 do not have service-connected disabilities, and their income is above both the national and the geographic thresholds. In 2017, about 2 million Veterans were in priority groups 7 and 8.

Although Veterans in priority groups 7 and 8 do not pay enrollment fees, they make copayments, and VA can bill their private insurance plans for reimbursement. Together, the copayments and reimbursements cover about 14 percent of VA’s costs of care for those groups. In 2017, VA incurred $6 billion in net costs for those patients, or about 9 percent of the department’s net spending for Veterans’ medical care. When priority groups were established in 1996, the Secretary of the Department of Veterans Affairs was given the authority to decide which groups VA would serve each year.

Because of budgetary constraints, VA ended enrollment of Veterans in priority group 8 in 2003. Veterans who were enrolled at that time were allowed to remain in VA’s health care system. In 2009, enrollment was reopened to certain Veterans in that group.

Option

This option would end enrollment in VA’s health care system for Veterans in priority groups 7 and 8: No new enrollees would be accepted, and current enrollees would be disenrolled starting in October 2019.

Effects on the Budget

The Congressional Budget Office estimates that ending enrollment for Veterans without service-connected disabilities and whose income exceeds the national threshold would reduce discretionary spending by $57 billion from 2020 through 2028. Under this option, about 2 million fewer Veterans would be enrolled in VA’s health care system each year. Because not all enrolled Veterans use VA medical care each year, an average of about 1 million Veterans would no longer be treated by VA in any given year. The result would be an average annual savings of about $6,000 per disenrolled patient over that period.

Mandatory spending for other federal health care programs—such as Medicare and Medicaid and federal subsidies provided through the health insurance marketplaces established under the Affordable Care Act— would increase because enrollees would seek medical care through other sources. (More than half of the enrollees in priority groups 7 and 8 are over the age of 65.) CBO estimates that, overall, mandatory spending would option.

The greatest sources of uncertainty in this estimate of savings over the next 10 years are CBO’s estimates of the number of Veterans affected by the option and how their reliance on other forms of health care might change. Under current law, enrollees in priority groups 7 and 8 receive nearly 20 percent of their medical care from VA. As the health care delivery and insurance markets evolve over the projection period, that pattern of reliance might change.

Other Effects

An advantage of this option is that VA could focus on Veterans with the greatest service-connected medical needs and the fewest financial resources. In 2017, nearly 90 percent of enrollees in priority groups 7 and 8 had other health care coverage, mostly through Medicare or private health insurance. As a result, the vast majority of Veterans who would lose access to VA health care would have other sources of coverage, including the health insurance marketplaces.

A disadvantage of the option is that Veterans in priority groups 7 and 8 who have come to rely on VA, even in part, might find their health care disrupted. Some Veterans—particularly those with income just above the thresholds—might find it difficult to obtain other care.

Revenue Options

CBO 006

Include Disability Payments From the Department of Veterans Affairs in Taxable Income

Background

The goal of the Department of Veterans Affairs (VA) disability system is to compensate Veterans for earnings lost as a result of service-connected disabilities. By law, that compensation is meant to equal the average reduction in earnings experienced by civilian workers with similar medical conditions or injuries.

Compensable service-connected disabilities are medical problems incurred or aggravated during active duty, although not necessarily during the performance of military duties. Applicable conditions range widely in severity and type, from scars and hypertension to the loss of one or more limbs. The amount of a Veteran’s base payment is linked to his or her composite disability rating, which can account for multiple disabilities and is expressed from zero to 100 percent in increments of 10 percentage points. Lower ratings generally reflect that Veterans’ disabilities are less severe; in 2017, about one in three recipients of disability compensation were rated as either 10 percent or 20 percent disabled. Beneficiaries do not have to demonstrate that their conditions have reduced their earnings or interfere with their daily functioning.

Disability compensation is not means-tested (that is, restricted to those with income below a certain amount), and payments are exempt from federal and state income taxes. Veterans who have a job are eligible for benefits, and most working-age Veterans who receive disability benefits are employed. Payments are in the form of monthly annuities and typically continue until the beneficiary’s death. Because disability benefits are based on VA’s calculation of average earnings lost as a result of specific conditions, payments do not reflect disparities in earnings that might result from differences in Veterans’ education, training, occupation, or motivation to work.

Although the number of Veterans in the total population is declining, the number receiving VA disability payments has risen each year. Both the share of Veterans receiving disability payments and the average amount of those payments have increased. Today, about 20 percent of Veterans receive disability compensation; in 2000, only 9 percent of all Veterans did. In 2017, VA paid about 4.6 million Veterans an average of $15,400 each in disability benefits. Of those Veterans, 1.3 million had a disability rating of 20 percent or less; their average payment was $2,200.

Option

This option consists of two alternative approaches to taxing VA disability benefits under the individual income tax. The first alternative would include all such disability payments in taxable income. The second alternative would include disability payments in taxable income only for Veterans with a disability rating of 20 percent or less.

Effects on the Budget

The staff of the Joint Committee on Taxation (JCT) estimates that, if implemented, the first alternative would increase federal revenues by $93 billion from 2019 through 2028. The second alternative would raise federal revenues by a smaller amount—$4 billion—over that period, according to JCT’s estimates.

The total benefits included in taxable income would be much larger under the first alternative than under the second alternative. As a result, the second alternative would raise federal revenues by a much smaller amount. Estimates of both alternatives reflect the scheduled increase in individual income tax rates that begins

in 2026.

The estimates are uncertain for two main reasons. First, they rely on the Congressional Budget Office’s projections of the Veteran population and disability compensation, which are inherently uncertain. Second, they rely on estimates of how individuals would respond to the change in tax policy. Those estimates are based on observed responses to prior changes in policy, which might differ from the response to this option.

Other Effects

An argument in favor of the option is that including disability payments in taxable income would increase the equity of the tax system. Taxing VA disability payments would make tax liabilities similar among taxpayers with comparable amounts of combined income (from disability payments, earnings, and other sources). Eliminating income exclusions in the tax system moves the system toward one in which people in similar financial and family circumstances face similar tax rates. Further, military disability retirement pay—a type of disability compensation received by those who retired from service because of a disability—is included in taxable income unless it is related to combat injuries. Including VA disability benefits in taxable income would make the treatment of the two types of benefits more similar.

An argument against this option is that VA disability payments are connected to military service, which is unlike civilian employment because it confers distinctive benefits to society and imposes special risks on service members. By that logic, enhancements to pay and benefits for service members — including the current exclusion of disability compensation from taxation — could be seen as a way to recognize the hardships of military service. However, Veterans are entitled to disability payments even for medical conditions unrelated to military duties, as long as those conditions were incurred while the individuals were serving on active duty. By contrast, disability benefits received by civilian workers for nonwork-related injuries are taxable if the employer paid the premiums.

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