Under VA’s Disability Compensation program, the agency can award total (100 percent) disability compensation to veterans who cannot work because of service-connected disabilities, even though their schedular rating is less than 100 percent. Specifically, VA will consider a veteran for IU benefits if the veteran has a single disability rated at least 60 percent or multiple disabilities rated at least 70 percent (with at least one disability rated at 40 percent or more) and there is some evidence that the veteran cannot work. In some instances, veterans with lower ratings may also be evaluated for and granted IU eligibility. As shown on table 1, veterans receiving an IU total disability compensation rate may receive substantially greater benefits than they would have received based on their schedular rating. IU benefits, like other VA disability compensation benefits, are exempt from federal taxation. VA created IU benefits in 1934. By statute, VA is required to adopt and apply a schedule of ratings to compensate veterans for reductions in average earning capacities resulting from service-connected medical conditions. This statute calls for compensation benefits to be tied to a schedule of ratings that is to be based, “as far as practicable,” upon the average impairments of earning capacity resulting from such injuries in civil occupations. The statute does not mention individual unemployability as a basis for granting benefits. However, VA regulations allow the agency to grant total (100 percent) disability compensation to a veteran who is unemployable due to his or her service-connected disabilities, but does not meet the requirements for a total disability using the rating schedule. Veterans can receive IU benefits when their service- connected disabilities result in their inability to obtain or retain “substantially gainful employment,” which VA defines as employment that is “ordinarily followed by to earn their livelihood with earnings common to the particular occupation in the community where the veteran resides.” Staff at VA’s 57 regional offices make virtually all eligibility decisions for VA disability compensation benefits, including IU benefits. These regional offices employ non-medical rating specialists to evaluate veterans’ eligibility for these benefits. Upon receipt of an application for compensation benefits, the rating specialist would typically refer the veteran to a VA medical center or clinic for an examination. Based on the medical examination and other available information, the rating specialist must first determine which of the veteran’s conditions are (or are not) service-connected. For service-connected conditions, the rating specialist compares the diagnosis with the rating schedule to assign a disability rating. (App. III provides examples of selected impairments from VA’s disability rating schedule.) As figure 1 shows, the service-connected impairments of IU beneficiaries include a wide range of medical conditions. Multiple disabilities will result in a combined degree of disability, which is expressed as a percentage and represents the overall effect on a veteran of all his or her service-connected disabilities. (App. IV explains VA’s process for compiling combined ratings.) VA’s IU determinations are subject to appeal to the Board of Veterans’ Appeals and subsequently the U.S. Court of Appeals for Veterans Claims. VA rating specialists initiate IU evaluations when a veteran submits an application for IU benefits or his or her application for compensation benefits contains evidence of unemployability. In all cases, before granting benefits, rating specialists must evaluate the impact that the veteran’s service-connected disability has had on his or her ability to perform substantially gainful employment, which for decision-making purposes is generally interpreted as employment that is more than “marginal employment.” VA generally defines marginal employment as employment for which the worker’s annual earned income is at or below the poverty threshold for one person established by the U.S. Census Bureau—$10,160 for 2005. However, marginal employment may also be held to exist, on a case by case basis, when a veteran maintaining employment at a sheltered workshop or family business receives annual earnings above the poverty threshold. VA rating specialists are to rely on various sources of information for the evidence needed to support such a determination, including an employment and earnings history furnished by the claimant, basic employment information from the claimant’s employers (if any), and a medical exam report from VHA. If the claimant had received vocational rehabilitation assistance from VA or disability benefits from SSA, the rating specialist might also seek information on these services or benefit decisions. Finally, under its regulations, VA rating specialists are not to consider age as a factor in determining eligibility for IU benefits; thus, veterans of any age may be determined eligible for IU benefits. When we analyzed VA data to determine the ages of all veterans receiving IU benefits as of October 2005, we found that the majority of veterans receiving IU benefits were age 60 or older. Our analysis of VA data shows that 219,725 veterans were receiving IU benefits in October 2005. As shown in figure 2, 51 percent of IU beneficiaries were age 60 or older and 38 percent were age 65 or older. In 1987, we issued a report that identified several problems with VA’s administration of IU benefits and made several recommendations for improvement. We found that VA did not require sufficient medical and vocational evaluation of IU claimants to support award decisions. To address this weakness, we recommended that, in cases involving IU benefits, VA ensure that its (1) examining physicians provide observations on how the service-connected medical condition impairs the veteran’s functional capabilities and (2) vocational counselors provide vocational information, including an assessment of how the veteran’s service- connected condition affects job skills and employment potential. Furthermore, we identified potential overpayments to IU beneficiaries and suggested that the Congress provide VA with access to Internal Revenue Service (IRS) earnings information to monitor IU eligibility and help detect and prevent overpayments. Since we made the recommendations, the Congress provided the agency with access to IRS earnings data, which the agency is using to monitor compliance with the ongoing earnings limit. However, to date, VA has not implemented our recommendation that its vocational counselors assess the veteran’s job skills and employment potential so that this information could be used in the IU decision-making process. More recently, two studies highlighted the need for fundamental changes to VA’s disability decision making. In 2004, the VA Vocational Rehabilitation and Employment Task Force study recommended that vocational professionals from VA’s VR&E should provide more complete vocational assessments to assist in disability and vocational decisions. More specifically, the task force recommended that VR&E perform a functional capacity evaluation that would identify what work a veteran could do in the paid economy despite his or her disabilities. Also, a 2005 VA Inspector General study pointed to the need for improved IU initial and ongoing eligibility determinations. The VA Inspector General found that some veterans receiving IU benefits may not have been entitled because VA had not aggressively used IRS and SSA records and developed proper controls to monitor their income through the verification process. In addition, the Veterans’ Disability Benefits Commission was created by the National Defense Authorization Act of 2004 (Pub. L. No. 108-136) to independently evaluate compensation to veterans and their survivors for disabilities and deaths attributable to military service. Among other things, the Commission plans to include IU benefits in its review. The law requires the Commission to provide a report to the Congress, with recommendations as needed, which addresses the appropriateness of benefits and the standards for granting benefits. In a recently issued report, we noted that additional benefits are available to veterans with total disabilities. In particular, awarding IU benefits increases a veteran’s monthly disability compensation. The increase in the monthly compensation for IU beneficiaries is the difference between the compensation at the veteran’s schedular rate and the compensation at the 100-percent rate. For example, a schedular rating of 60 percent would entitle a veteran to $839 per month in 2005. The veteran, however, would be entitled to $2,299 per month if granted IU benefits—a difference of $1,460 per month or $17,520 per year. The lower the veteran’s schedular rating, the higher his or her increase in monthly disability compensation when awarded IU benefits. When the present value of IU benefits is considered over a veteran’s lifetime, the value of these added benefits depends upon the veteran’s schedular rating at the time he or she begins receiving IU benefits and the length of time these benefits are received. To illustrate the potential amount of added benefits that could be received due to IU, we estimated the lifetime present value of the increase in disability compensation benefits for veterans with schedular disability ratings between 60 and 90 percent who began receipt of IU benefits in 2005 at different ages. To calculate these lifetime present values, we used the SSA general population mortality tables for males to estimate the lifespan of IU beneficiaries. Because benefits awarded to younger veterans would be expected to be received for a longer length of time in comparison with older veterans, younger veterans are estimated to receive more in benefits than older veterans who have the same schedular rating. Also, because the lower the veteran’s schedular rating, the greater the increase in monthly disability compensation benefits when awarded IU benefits, veterans with lower ratings were estimated to receive more in added IU benefits than those of the same age with higher schedular ratings. For example, for younger veterans, those at age 20 in 2005, the estimated lifetime present value of these benefits can range from almost $300,000 to over $460,000. Even for older veterans, the value of these benefits can be substantial. For veterans awarded IU benefits at age 75 in 2005, the lifetime present value of these benefits can range from about $89,000 to about $142,000. The estimated lifetime present values of the added benefits for veterans awarded IU benefits in 2005 at selected ages and schedular ratings is shown in figure 3. When we analyzed VA data to determine the age at which veterans begin receiving IU benefits, we found that just under half of new IU beneficiaries were awarded IU benefits at the age of 60 or older. For example, we found that 46 percent of veterans awarded IU benefits from October 2004 to October 2005 were age 60 or older, and 19 percent were age 75 or older.