The Effect of Transfer Income on Labor Force Participation and Enrollment in Federal Benefits Programs: Evidence from the Veterans Disability Compensation Program
NBER Retirement Research Center Paper No. NB 08-07
Issued in October 2008
We analyze the behavioral responses of near-elderly males to unconditional grants of substantial cash disability benefits from the Veterans Administration's Disability Compensation (DC) program. The largely unstudied DC program provides income and health insurance to approximately three million veterans of military service who have service-connected disabilities. In contrast to other federal disability programs, receipt of DC benefits depends only on a veteran's diagnoses and is not contingent upon labor force status; thus, analysis of the behavioral responses to the DC program may inform economic understanding of the incentive and non-incentive effects of receipt of transfer income. We analyze these behavioral effects on the labor force participation of veterans, as well as their spillovers to claims on other federal benefits programs. We study a unique policy change, the 2001 Agent Orange decision, which expanded eligibility for DC benefits to a broader set of covered conditions—in particular, type II diabetes—to Vietnam veterans who had served in-theater (with 'Boots on the Ground' or BOG). Notably, the Agent Orange policy excluded Vietnam era veterans who did not serve in-theatre ('Not on Ground' or NOG), thus allowing us to assess the causal affects of DC edibility by contrasting the outcomes of BOG and NOG veterans. We find clear evidence that the increase in DC enrollment caused by the 2001 policy change had a significant negative effect on the labor supply of Vietnam veterans who had Boots on the Ground. Almost thirty percent of individuals who became eligible for the DC program dropped out of the labor force. The policy change also had an effect on enrollment in benefits programs administered by the Social Security Administration. Most notably, it raised SSDI enrollment among veterans who became newly eligible for DC benefits by a full percentage point. We also find suggestive evidence of spillovers from DC to both SSI and OASI benefits. Our ongoing work analyzes in detail the causal channels through which these labor supply and programmatic responses operate.
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