VA provides tax-free compensation to veterans who have service- connected disabilities.The payment amount is based on a disability rating scale that begins at 0 for the lowest severity and increases in 10-percent increments to 100 percent for the highest severity. More than half of initial applicants claim multiple disabilities, and veterans who believe their disabilities have worsened can reapply for higher ratings and more compensation. For veterans who claim more than one disability, VA rates each claim separately and then combines them into a single rating. About two-thirds of compensated veterans receive payments based on a rating of 30 percent or less. At the base compensation level, these payments range from $98 per month at 10-percent disability to $288 per month at 30-percent disability.Base compensation for veterans with a 100-percent disability rating is significantly higher—$2,036 per month in 2000. Disability ratings are also used to determine eligibility for certain other VA benefits. For example, veterans with a 30-percent disability rating are entitled to an additional allowance for dependents, and those with higher ratings can become eligible for free VA nursing home care and grants to adapt housing for their needs. In addition, priority for care for VA health care is partly tied to disability ratings. VA has had long-standing difficulties in keeping up with its claims processing workload, resulting in increasing backlogs of pending claims.In fiscal year 1999, VA received approximately 468,000 compensation claims—about 345,000 of which were repeat claims. More than 207,000 claims were still pending at the end of fiscal year 1999—an increase of nearly 50 percent from the end of fiscal year 1996—and the average processing time was 205 days. Of the 207,000 pending claims, about 69,000 were initial claims, and about 138,000 were repeat claims. In its 1996 report, the Veterans’ Claims Adjudication Commission observed that 56 percent of veterans with pending repeat claims were rated as 30- percent or less disabled. Questioning whether VA should expend a significant share of its resources processing claims for veterans who are already compensated and have relatively minor disabilities, the Commission raised the possibility of offering lump sum payments to veterans with minimal disabilities. Other federal agencies have established this type of payment program. For example, under DOD’s disability program, mandatory lump sum payments are given to separating military personnel with less than 20 years of service and a disability rating of less than 30 percent, and the Department of Labor allows injured civilian federal employees to request lump sum payments for bodily loss or impairment instead of the scheduled duration of weekly payments. Six countries—Australia, Canada, Germany, Great Britain, Israel, and Japan—provide lump sum payments to at least some of their disabled veterans. Britain, Canada, Israel, and Japan make these payments to veterans with minor disabilities, while Germany supplements veterans’ pensions with a lump sum payment for those whose ability to work has been severely restricted. For peacetime service, Australia pays lump sum compensation for noneconomic losses from permanent impairments; it also provides a lump sum payment for a reduced capacity to work, if the incapacity is likely to be stable and would otherwise entitle the veteran to only a relatively small weekly pension. Veterans’ views captured through our survey and focus groups were based on the following features of both the lump sum and monthly payment options: Both types of payment—monthly and lump sum—would be tax-free. Under both types of payment, veterans would continue to be entitled to VA medical and other current benefits. Under the monthly payment system, veterans could reapply for increased payments for a worsening disability; under the lump sum system, veterans could not reapply for additional payments for a worsening disability for which a lump sum had been received. When the lump sum recipient dies, the surviving family would not have to repay any portion of the lump sum. Reactions to this hypothetical framework yielded no clear consensus among compensated veterans about whether a choice between monthly payments and a lump sum should be offered to newly compensated veterans. Among compensated veterans, 49 percent said they would definitely or probably support a lump sum option for newly compensated veterans, 43 percent said they would definitely or probably not support it, and 8 percent were unsure. Respondents whose views were “definite” were also about equally split—about 24 percent definitely supported offering a choice, and about 28 percent definitely opposed it (see fig. 1). Veterans’ responses indicate that experience could influence interest in taking a lump sum payment. Among all veterans, 32 percent reported they would have been interested in taking a lump sum payment when first compensated had such an option been available.Half as many—16 percent—reported that, knowing what they know today, it would have been a good choice for them. This ratio was borne out among supporters of offering a lump sum choice—56 percent indicated they would have been interested in a lump sum payment, and 28 percent said it would have been a good choice for them. Age and severity of disability also seemed to influence the degree of interest in taking a lump sum payment. For example, among veterans aged 43 or younger, 46 percent reported they definitely or probably would have been interested in taking a lump sum payment, compared to 21 percent of veterans aged 61 or older.Similarly, among veterans whose current disability rating is 10 percent or less, 39 percent reported definite or probable interest in a lump sum, compared to 22 percent with disability ratings of 40 percent or more (see fig. 2). Younger, more recently rated, and less severely disabled veterans—groups that expressed greater interest— could be a better gauge of newly compensated veterans’ interest in taking a lump sum payment because they may be more similar to potential recipients than are other veterans. Thus, if future newly compensated veterans are offered a lump sum option, the actual percentage of those interested in it could exceed the 32 percent found among current veterans. Although our results indicate some receptivity to a lump sum option, interest and support would likely depend on the specific design of the payment program. For example, among military retirees with 20 years of service—whose compensation is now a tax-free portion of their retirement pay—interest in a lump sum payment increased from 29 percent to 66 percent after they learned in the survey that the lump sum might be offered in addition to their full retirement pay. Veterans and military personnel in our focus groups expressed considerable interest in knowing additional details about the proposed lump sum option—particularly about the lump sum payment amount. Others asked for clarifications about the program, such as whether there could be circumstances under which lump sum recipients could reapply for additional compensation. In reacting to the option, some indicated that they had made assumptions about the amount. Others felt they could not give an informed opinion or make a decision without more information—or the “fine print,” as one individual put it. Some were skeptical and suggested that the lump sum option was a way for the government to cut VA benefits and reduce its obligations to those whose disabilities may get worse. Through our focus group sessions and discussions with veteran and military organizations, we found that veterans and military personnel perceive advantages and disadvantages of offering a lump sum option. However, information on the actual effects of lump sum payments on veterans’ financial well-being is limited. While some studies have examined how recipients use lump sum payments, they do not address how likely lump sum recipients are to be financially advantaged or disadvantaged as a result of receiving a lump sum payment rather than monthly payments. Veterans and military personnel identified several advantages and disadvantages associated with a lump sum payment option (see table 1). These advantages and disadvantages generally weigh the benefit of financial flexibility against the risk of financial loss. Veterans and military personnel who said the lump sum payment would put recipients at risk of being less well off or unable to pay for basic necessities such as food and housing provided several reasons to support their perception. Some reported that most lump sum recipients—particularly younger veterans and those already in financial need—would not have adequate money management skills. For example, some said that recipients may squander the one-time payment before reaching old age. They also said that more lump sum recipients would spend rather than invest the money, and those who did invest would be at risk of making poor investments. These veterans and military personnel also expressed concern that the lump sum amounts would be inadequate to protect recipients from financial setbacks that could result from a progressive disability and the inability to reapply for a higher disability rating. Some were similarly concerned that the initial rating could be inaccurate or unfairly low or that the average life span on which the lump sum was calculated would be insufficient to support recipients who outlived this average. Finally, veterans and military personnel said that choice creates risk because information may be incomplete or biased, individual judgment may be poor, or both. Some said a lump sum option would actually lead to more poor judgments because people would find a large sum of money so immediately attractive that they would not adequately consider the long- term financial consequences of taking it. On the other hand, others said that there would be benefits to a lump sum payment option. For example, some said lump sums could be used to make investments or large purchases, such as a house or an education; settle debts; or start a business. In addition, veterans and military personnel said that the benefit of providing a choice outweighed any risks. This high value placed on choice seems to underlie much of the option’s support, since our survey indicated that, among veterans who supported the lump sum option, 28 percent thought in hindsight that a lump sum would have been the better choice for them. As one veteran said, “I don’t believe that the lump sum option is a good idea, but it’s America and veterans should have a choice.” Another supporter of choice argued that, while a lump sum payment invested in stocks could be substantially reduced if the market falls, monthly payments could be routinely squandered.