United States General Accounting Office

GAO Report to Congressional Committees

April 1995 VETERANS

COMPENSATION

Offset of DOD

Separation Pay and VA

Disability

Compensation

GAO/NSIAD-95-123

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

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

Page 1 GAO/NSIAD-95-123 Veterans Compensation
B-260044 

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 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

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.

Page 2 GAO/NSIAD-95-123 Veterans Compensation
B-260044 

DOD separation pay and VA disability compensation if both forms of

compensation stem from a single period of service.

Results in Brief 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.

Separation Pay 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.

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.

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B-260044 

Justification for and

Workings of

Separation and

Disability Pay Offsets

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.

Cost of Repealing

Separation and

Disability Pay Offsets

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.

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.

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.

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B-260044 

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.

Offsets’ Effect on the

Voluntary Separation

Incentive

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.

Agency Comments 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

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

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.

Page 5 GAO/NSIAD-95-123 Veterans Compensation
B-260044 

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

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.

Page 6 GAO/NSIAD-95-123 Veterans Compensation
B-260044 

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.

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

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.

Page 7 GAO/NSIAD-95-123 Veterans Compensation
Contents

Letter 1

Appendix I 

Separation and

Disability Pay

Examples

10

Separation Pay Examples 10

Disability Pay Examples 11

Appendix II 

Major Contributors to

This Report

13

Tables Table I.1: Number of Actual and Estimated SSB, VSI, and

Involuntary Separations, Fiscal Years 1992-99

10

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

Service

11

Table I.3: Monthly VA Disability Compensation Paid to Recipients

in October 1994

12

Abbreviations

DOD Department of Defense

SSB Special Separation Benefit

VA Department of Veterans Affairs

VSI Voluntary Separation Incentive

Page 8 GAO/NSIAD-95-123 Veterans Compensation
Page 9 GAO/NSIAD-95-123 Veterans Compensation
Appendix I 

Separation and Disability Pay Examples

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

Fiscal year SSB VSI Involuntary 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

1998a 780 20 12,200 13,000

1999a 780 20 12,200 13,000

Total 95,531 17,960 80,201 193,692

Note: Figures for 1995-99 are estimates.

aDOD 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

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

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.

Page 10 GAO/NSIAD-95-123 Veterans Compensation
Appendix I 

Separation and Disability Pay Examples

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 Pay options

Grade

Years of

service

Involuntary

separation SSB

VSI annual

payment

Total VSI

paymenta

E3 7 $9,289 $13,936 $2,324 $32,536

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

aThe 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.

Disability Pay

Examples

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

Page 11 GAO/NSIAD-95-123 Veterans Compensation
Appendix I 

Separation and Disability Pay Examples

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 Degree of disability (percent)

Number of

recipients Basic pay Maximum 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.

Page 12 GAO/NSIAD-95-123 Veterans Compensation
Appendix II 

Major Contributors to This Report

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

(703093) Page 13 GAO/NSIAD-95-123 Veterans Compensation
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