Veterans Compensation: Offset of DOD Separation Pay and VA Disability
Compensation (Letter Report, 04/03/95, GAO/NSIAD-95-123).

The Defense Department (DOD) uses separation pay to induce people to
serve in the military despite the risk of involuntary separation.
Congress authorized special separation pay to minimize the use of
involuntary separations in the ongoing force drawdown.  Pay offsets
prevent service members from receiving dual compensation for a single
period of service.  Repealing offsets for separation and disability pay
would cost the federal government an estimated $435 million for those
service members who separated during fiscal years 1995-99.  A repeal
would cost about $799 million if it was made retroactive to fiscal year
1992, when the special separation pay program began.  Separation and
disability pay offsets have not significantly undermined the voluntary
separation incentive.  According to DOD, the bulk of the drawdown since
fiscal year 1992 has been accomplished through voluntary separations.
DOD requires the services to inform separating service members about the
offset.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-123
     TITLE:  Veterans Compensation: Offset of DOD Separation Pay and VA 
             Disability Compensation
      DATE:  04/03/95
   SUBJECT:  Military downsizing
             Dual compensation
             Veterans disability compensation
             Military pay
             Compensation
             Military disability retirement pay
             Military discharges
             Offsetting collections
             Military personnel
             Employee incentives

             
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Cover
================================================================ COVER


Report to Congressional Committees

April 1995

VETERANS COMPENSATION - OFFSET OF
DOD SEPARATION PAY AND VA
DISABILITY COMPENSATION

GAO/NSIAD-95-123

Veterans Compensation


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  SSB - Special Separation Benefit
  VA - Department of Veterans Affairs
  VSI - Voluntary Separation Incentive

Letter
=============================================================== LETTER


B-260044

April 3, 1995

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Alan K.  Simpson
Chairman
The Honorable John D.  Rockefeller IV
Ranking Minority Member
Committee on Veterans Affairs
United States Senate

The Honorable Floyd D.  Spence
Chairman
The Honorable Ronald V.  Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Honorable Bob Stump
Chairman
The Honorable G.V.  (Sonny) Montgomery
Ranking Minority Member
Committee on Veterans Affairs
House of Representatives

As required by the National Defense Authorization Act for Fiscal Year
1995, we examined issues related to the legally required offset of
certain types of Department of Defense (DOD) separation pay.  In
these offsets, money is withheld from veterans who also qualify for
monthly disability pay from the Department of Veterans Affairs (VA). 

In this report we (1) explain the purpose of the separation pay
programs, (2) explain the justification for offsetting pay, (3)
estimate the cost to the federal government of repealing certain
offsets, and (4) determine whether these offsets have discouraged
personnel from separating voluntarily.  At your request, we also
examined how the federal government taxes separation and disability
pay but, as agreed with your offices, we will address that issue in a
separate letter when the work is complete. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In 1991 (P.L.  102-190, National Defense Authorization Act for Fiscal
Years 1992 and 1993), Congress authorized special separation pay from
DOD to personnel who separate voluntarily by September 30, 1999, but
are not eligible to retire.  To shape the force structure and retain
personnel in hard-to-fill military occupations, DOD is authorized to
target special separation pay offers to service members in selected
military occupations.  Service members who voluntarily separate may
choose from two voluntary separation pay plans--(1) a lump sum
payment, known as a special separation benefit (SSB) or (2) an annual
annuity, known as a voluntary separation incentive (VSI).\1

DOD may involuntarily separate service members and provide them
either full or reduced lump sum separation pay if they received an
honorable or a general discharge, under authority granted by Congress
in 1980
(P.L.  96-513, Defense Officer Personnel Management Act).\2 DOD may
reduce this pay if the separating service member is deemed not fully
qualified for retention and is denied reenlistment or continuation in
the military service under the following conditions, if (1) the
member's service obligation has expired, (2) DOD has changed the
member's service obligation, (3) the separation is for the
convenience of the government, (4) the service member has engaged in
homosexual conduct, (5) the service member has failed drug or alcohol
abuse rehabilitation, (6) the service member is unable to maintain a
required security clearance, or (7) the service member has failed to
meet weight control standards. 

VA issues monthly disability compensation to veterans determined to
have a service-connected disability.  The size of the payments is
based on the degree of the veteran's disability.  The payments
compensate for an assumed reduced earning power in the civilian
economy.  Payments are made for as long as the service-connected
disability persists.  The laws that authorize separation payments
also prohibit veterans from receiving both DOD separation pay and VA
disability compensation if both forms of compensation stem from a
single period of service. 


--------------------
\1 The SSB is calculated as 15 percent of the service member's final
monthly basic pay multiplied by 12 and again by the member's years of
service.  The VSI is calculated as 2.5 percent of the member's final
monthly basic pay multiplied by 12 and again by the service member's
years of service.  The VSI is paid annually for twice the number of
years of service. 

\2 Involuntary separation pay is calculated as 10 percent of the
service member's final monthly basic pay multiplied by 12 and again
by the member's years of service.  See appendix I for a comparison of
involuntary and voluntary separation pay amounts at selected pay
grades. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

DOD uses separation pay as an incentive to people to serve in the
military despite the risk of involuntary separation.  Congress
authorized special separation pay to minimize the use of involuntary
separations in the ongoing force drawdown.  Pay offsets prevent
service members from receiving dual compensation for a single period
of service. 

Repealing offsets for separation and disability pay would cost the
federal government an estimated $435 million (in 1994 dollars) for
those service members who separated from fiscal years 1995-99.\3 A
repeal would cost about $799 million if it was made retroactive to
fiscal year 1992, when the special separation pay program began.\4

Separation and disability pay offsets have not significantly
undermined the voluntary separation incentive.  According to DOD, the
bulk of the drawdown since fiscal year 1992 has been accomplished
through voluntary separations.  DOD requires the services to inform
separating service members of the existence of the offset. 


--------------------
\3 This estimate does not take military pay raises into account that
Congress may grant from fiscal years 1995-99. 

\4 These estimates do not include the administrative costs of
reimbursing those who have already separated. 


   SEPARATION PAY
------------------------------------------------------------ Letter :3

DOD helps separating service members to maintain a level of income
after discharge by paying separation pay.  Separation pay for
involuntary separation provides an incentive to pursue a military
career with the knowledge that DOD will provide compensation if, for
example, the service member twice fails promotion to the next higher
grade, under the up or out promotion system. 

Special separation pay helps DOD to meet downsizing goals while
minimizing the use of involuntary separation.  The pay for voluntary
separation is higher than for involuntary separation.  Thus, service
members have an incentive to separate voluntarily. 


   JUSTIFICATION FOR AND WORKINGS
   OF SEPARATION AND DISABILITY
   PAY OFFSETS
------------------------------------------------------------ Letter :4

The offsets prevent veterans from receiving dual compensation for a
single period of service.\5

VA withholds the full amount of monthly disability pay from veterans
who received an SSB or involuntary separation lump sum payment.  DOD
withholds an amount of the annual VSI payment equal to the disability
compensation paid by VA during the year. 

The outstanding repayment balance is reduced each month by the amount
of the withheld monthly disability compensation or the withheld
annual VSI until the full separation amount is recouped.  At that
point, veterans, who received a lump-sum separation payment, begin to
actually receive monthly disability compensation. 

In 1891, Congress first prohibited the concurrent receipt of dual
forms of compensation in the military, banning the payment of
pensions (as disability compensation was then known) to active duty
or retired personnel.  The current prohibition was enacted in 1958
and has remained relatively unchanged.  The acts authorizing
voluntary and involuntary separation pay also prohibit the concurrent
receipt of VA disability compensation. 


--------------------
\5 Other dual pay offsets also exist.  For example, federal law
offsets military retired pay and VA disability compensation, and
federal civilian workers are prohibited from receiving both federal
retirement benefits and workers' compensation or disability benefits
for the same period of service. 


   COST OF REPEALING SEPARATION
   AND DISABILITY PAY OFFSETS
------------------------------------------------------------ Letter :5

We project that DOD will separate about 85,400 service members
eligible for separation pay from fiscal years 1995-99, and about
13,700 (16 percent) of those will also qualify for disability
compensation from VA.\6 Repealing the offsets would cost the federal
government an estimated $435 million to compensate service members
who separated from fiscal years 1995-99 and qualified for VA
disability compensation.  This total includes (1) $126 million in SSB
payments, (2) $118 million in VSI payments, and (3) about $191
million in involuntary separation payments. 

Making the repeal retroactive to veterans who separated since fiscal
year 1992 would cost an additional $364 million, consisting of (1)
$282 million in SSB payments, (2) $10 million in VSI payments already
made plus about $37 million more committed to be paid over the life
of the VSI pay period, and (3) $35 million in involuntary separation
payments.  Thus, a retroactive repeal could cost up to $799 million
in additional separation pay. 

The additional federal expenditure needed to pay for the offset
repeal would be spread out over many years because much of the
additional expenditure consists of the monthly disability payments
that would no longer be withheld by VA. 


--------------------
\6 DOD expects to separate at least 91,000 more personnel from fiscal
years 1995-97 through early retirement, involuntary retirement,
reduced accessions, and other means. 


   OFFSETS' EFFECT ON THE
   VOLUNTARY SEPARATION INCENTIVE
------------------------------------------------------------ Letter :6

The offsets have not significantly undermined the separation
incentive.  According to DOD, less than 10 percent of all separations
since fiscal year 1992 were involuntary, although DOD projects the
proportion of involuntary separations to rise by 1999.\7 In addition,
according to DOD, many involuntary separations consisted of normal
losses needed to implement the up or out promotion system. 

DOD officials stated that the services are required to inform
separating service members of the requirements to (1) pay income tax
on the gross amount of the separation pay and (2) repay the gross
amount of the separation pay if they also receive disability
compensation.  While we did not attempt to verify that separating
service members actually received this information, DOD provided
evidence that it does require the services to include this
information in a transition program for separating service members. 


--------------------
\7 The proportion of involuntary separations cited by DOD takes into
account (1) reduced accessions, (2) voluntary early releases, (3)
early retirements, (4) special early retirement boards, and (5) other
separation authorities, as well as the separation authorities
reviewed in this report. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

As agreed with your offices, we did not seek formal agency comments
on this report due to the short time frames.  DOD and VA did provide
oral comments on the report.  Each generally agreed with the findings
in our report and offered technical corrections, which were
incorporated in the final text. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We conducted our work in Washington, D.C., at DOD and VA.  We
reviewed department correspondence, instructions, manuals, and other
documents and discussed these documents and other policy statements
with officials from both departments.  We also reviewed legislative
histories, including congressional hearing records and committee and
conference reports.  In addition, we obtained information on the
offset from officials of the Disabled American Veterans and the
American Legion. 

To estimate the number of service members who may separate and
receive disability payments from fiscal years 1995-99, we adopted
several critical assumptions and constructed an automated database
consisting of DOD separation files and VA disability compensation
case files.\8 First, we assumed that Congress and DOD will make no
changes to the separation payment program, particularly that the
payment formulas will not be changed and the program will neither be
extended nor terminated early.  Second, we assumed that the mix of
separating service members will remain constant over time with
respect to (1) years of service at time of separation, (2) basic pay
at time of separation, (3) rank or grade at time of separation, (4)
proportion of all separating service members who qualify for
disability compensation, and (5) degree of disability of separating
service members at the time of qualification for disability
compensation.  If any of those assumptions subsequently prove untrue,
the actual cost of the separation program may change.  DOD estimated
the number of personnel likely to separate through the end of fiscal
year 1997, and we accepted that estimate as the basis for our work. 
We estimated the number of personnel likely to separate in fiscal
years 1998 and 1999 by extending the 1997 annual estimate through
1999, as suggested by DOD officials. 

To estimate the value of future separation and disability pay, we
first took the average paid out in each separation pay category in
fiscal years 1992-94 and disability pay allocated at specified
degrees of disability.  We then adjusted the separation pay and
disability compensation for 1992 and 1993 to reflect 1994 pay rates. 
We then calculated the 3-year averages for separation pay and
disability compensation, and projected these averages to the
population estimated to separate from fiscal years 1995-99.  Our
separation pay projections do not take into account military pay
raises that may be granted in fiscal years 1995-99.  If raises are
granted, separation pay may be higher because base pay at the time of
separation is a factor in calculating separation entitlements.  Our
disability pay projections were done assuming that no cost-of-living
adjustment was granted from fiscal years 1995-99. 

To estimate the cost to the government of repealing the offset, we
used the database to identify those veterans who separated and
received a separation payment and disability compensation in fiscal
years 1992-94.  We then totaled separation payments authorized to
them to obtain the total value of pay that was offset.  The result is
the amount of additional expense that the government would incur if
any repeal was made retroactive to fiscal year 1992.  We then used
our and DOD's projections on separations, years of service, grade at
time of separation, and assumed that 16 percent qualify for
disability pay, as was the case in fiscal years 1992 and 1993, and
applied a repeal of the offset to their estimated separation pay from
fiscal years 1995-99.\9 The total amount of their separation pay
represents the additional expense that the government would incur if
the offset were repealed. 

We conducted our work from November 1994 to March 1995 in accordance
with generally accepted government auditing standards. 

As agreed with your offices, we did not determine the impact of the
offset on the affected veterans because verifiable data was not
readily available. 


--------------------
\8 We did not test the reliability of DOD's and VA's data or assess
the adequacy of internal controls over their computer-based systems. 

\9 We did not include fiscal year 1994 disability case files in this
calculation because the number of cases for fiscal year 1994 was
unusually low at the time of our review.  This may be caused by the
amount of time it can take between separation from DOD and
qualification for disability compensation with VA. 


---------------------------------------------------------- Letter :8.1

As agreed with your offices, unless you publicly announce the
contents earlier, we plan no further distribution of this report
until 2 days after the date of this letter.  At that time, we will
send copies to other interested congressional committees; the
Secretaries of Defense and Veterans Affairs; the Director, Office of
Management and Budget; and Administrator, Internal Revenue Service. 
We will also make copies available to other interested parties upon
request. 

Please contact me on (202) 512-5140 if you or your staff have any
questions.  The major contributors to this report are listed in
appendix II. 

Mark E.  Gebicke
Director, Military Operations
  and Capabilities


SEPARATION AND DISABILITY PAY
EXAMPLES
=========================================================== Appendix I

In fiscal years 1992-94, the Department of Defense (DOD) separated
108,333 service members and paid or committed to pay about $5.9
billion in special separation benefits (SSB), voluntary separation
incentives (VSI), or involuntary separation pay.  During fiscal years
1995-99, we estimate that about 25,700 service members will
voluntarily separate and that DOD will involuntarily separate about
another 59,700 service members, for a total of about 85,400 and
authorize one of the three separation payments.  We estimate that the
federal government may spend about $2.7 billion on separation pay
from fiscal years 1995-99.  This total includes about (1) $789
million in SSB payments, (2) $734 million in VSI payments, and (3)
about $1.2 billion in involuntary separation payments. 

Table I.1 shows actual and estimated separations for fiscal years
1992-99 by SSB, VSI, or involuntary separation pay category. 



                          Table I.1
           
           Number of Actual and Estimated SSB, VSI,
             and Involuntary Separations, Fiscal
                        Years 1992-99

                                   Involu
Fiscal year           SSB     VSI   ntary        Total
-----------------  ------  ------  ------  =================
1992               45,301   6,779   5,419       57,499
1993               17,986   5,089   8,267       31,342
1994               10,345   2,324   6,823       19,492
1995               17,566   3,419  11,642       32,627
1996                1,989     287  11,443       13,719
1997                  784      22  12,207       13,013
1998\a               780\     20\  12,200       13,000\
                                        \
1999\a               780\     20\  12,200       13,000\
                                        \
============================================================
Total              95,531  17,960  80,201       193,692
------------------------------------------------------------
Note:  Figures for 1995-99 are estimates. 

\a DOD did not project separations for fiscal years 1998 and 1999. 
On the basis of discussions with DOD officials, we rounded the
estimated fiscal year 1997 figures and used them as estimates for
fiscal years 1998 and 1999. 


   SEPARATION PAY EXAMPLES
--------------------------------------------------------- Appendix I:1

For fiscal years 1995-99, about 3,500 officers will each receive an
average of $58,000, and about 18,400 enlisted personnel will each
receive $31,900 as a lump sum payment for voluntary separation.  In
addition, about 600 officers will each receive about $11,700 annually
(about $267,700 over about 23 years), and about 3,200 enlisted
personnel will each receive about $6,900 annually (about $181,200
over about 26 years) for accepting a VSI.\1 Service members that are
involuntarily separated may receive an average of about $41,600 each
for officers and about $16,000 each for enlisted personnel at full
pay.  Service members voluntarily separating can qualify for more
separation pay than those that are involuntarily separated, as shown
by the examples in table I.2. 



                          Table I.2
           
             Illustrated Pay Options at Selected
                 Grades and Years of Service


                Years  Involu             VSI
                   of   ntary          annual
               servic  separa          paymen    Total VSI
Grade               e    tion     SSB       t    payment\a
-------------  ------  ------  ------  ------  =============
E3                  7  $9,289  $13,93  $2,324     $32,536
                                    6
E4                  7  10,822  16,229   2,702     37,828
E6                 12  24,492  36,742   6,120     146,880
O2                 10  30,440  45,666   7,610     152,200
O4                 14  60,788  91,168  15,190     425,320
O5                 13  59,358  89,037  14,846     385,996
------------------------------------------------------------
\a The total VSI payment is the sum of the annual payments, which are
paid for twice the number of years of service. 

Of the 108,333 service members DOD has already separated, 11,784 had
qualified for disability compensation from the Department of Veterans
Affairs (VA) and were expected to have about $364 million of their
separation pay offset, once recoupment is complete.  In fiscal years
1992 and 1993, DOD separated 88,841 service members and authorized
SSB, VSI, or involuntary separation payments.  Of those service
members, 13,836 (about 16 percent) had qualified for disability
compensation from VA at the time of our review.  Assuming that 16
percent of future separatees would also qualify for disability
compensation, about 13,700 more service members would qualify for
disability compensation from VA. 

The average disability compensation ranged from about $87 to about
$187 per month in fiscal year 1994 for those who also received
separation pay.  If the degree of disability of future recipients
mirrors that of those who separated and received disability
compensation in fiscal years 1992-94, the average disability payment
will remain about the same unless Congress grants cost-of-living
adjustments. 


--------------------
\1 The different VSI separation pay periods for officers and enlisted
personnel reflect the different projections of years of service of
each group at time of separation, which is an important factor in
determining the total VSI compensation to be paid. 


   DISABILITY PAY EXAMPLES
--------------------------------------------------------- Appendix I:2

VA makes monthly payments to veterans on disability.  Monthly
disability payment amounts are set by Congress and related to degrees
of disability (expressed in terms of percentages).  Veterans receive
larger monthly payments for greater degrees of disability.  In
addition, disabled veterans may receive extra compensation for
specified disabilities, for example, if they have lost a limb or
eyesight, are bedridden, or (in certain circumstances) if they have
dependents.  Thus, the monthly amount paid to veterans will differ
based on individual circumstances, even if the degree of disability
is rated as the same. 

In October 1994, VA made disability payments to 11,784 veterans who
had separated from DOD and received an SSB, a VSI, or an involuntary
separation payment in fiscal years 1992-94.  Table I.3 shows the
ranges of payments that these and other disabled veterans were
receiving monthly or would begin receiving on repaying their
separation payment. 



                          Table I.3
           
           Monthly VA Disability Compensation Paid
                to Recipients in October 1994

                                Number
                                    of
Degree of disability          recipien     Basic     Maximum
(percent)                           ts       pay         pay
----------------------------  --------  --------  ----------
10                              43,825       $87        $157
20                              19,820       166         253
30                              11,897       253         706
40                               7,008       361       1,879
50                               2,870       515       1,004
60                               2,023       648       2,062
70                                 804       819       2,227
80                                 409       948       2,171
90                                 125     1,067       2,241
100                              1,450     1,774       5,414
Total                           90,231
------------------------------------------------------------
Note:  This table includes only those veterans who entered VA rolls
from fiscal years 1992-94 and were on the rolls in October 1994.  The
table includes disabled veterans who never qualified for or received
separation pay from DOD. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Sharon A.  Cekala, Associate Director
William E.  Beusse, Assistant Director
Brian J.  Lepore, Evaluator-in-Charge
Jai E.  Lee, Senior Computer Specialist
Charles W.  Perdue, Senior Economist

OFFICE OF THE GENERAL COUNSEL

Linda C.  Glass, Assistant General Counsel
Rachel M.  DeMarcus, Assistant General Counsel
Roger H.  Ayer, Senior Attorney
Joseph P.  Wallace, Legal Intern

