Symposium | 16 for ’16

A Trust Fund for Veterans

By Linda J. Bilmes

Tagged AfghanistanIraqMilitary

At a time when public confidence in our political institutions is near an all-time low, the U.S. military retains almost universal respect. Unfortunately, this respect hasn’t translated into a guarantee of a secure future for the veterans of Iraq and Afghanistan. As with previous wars, the costs of providing care will peak several decades after these wars have ended. Benefits for World War I veterans peaked in 1969 and for World War II veterans in 1986; payments for Vietnam-era vets are still climbing.

This time around, for a host of reasons, veterans’ costs will be much steeper. Half of the two million troops who have served in Iraq and Afghanistan have already been awarded lifetime disability benefits. Higher survival rates from injuries, better medical treatment, more generous disability compensation, and an unprecedented level of physical and mental health conditions among returning troops mean that the cost of providing lifetime disability and health-care benefits will easily surpass $1 trillion in the coming decades. Where will the money come from?

The Department of Veterans Affairs (VA) already has the fastest-growing budget in the federal government. Since 2001, it has risen from $61 billion to nearly $180 billion. The VA now employs 350,000 workers nationwide—roughly double the number back in 2001, prior to the U.S. invasion of Afghanistan. Despite this expansion, the VA has a chronic backlog of disability claims, arising from the overwhelming number of Vietnam and Gulf War veterans filing claims in addition to those who served in Iraq and Afghanistan. In total, some 6.6 million veterans are seeking medical care in the VA system today—up from 4.2 million in 2001. The VA still lacks sufficient funding to fill thousands of vacancies for doctors and nurses and to finance badly needed repairs to its hospitals and clinics.

President Abraham Lincoln famously pledged to “care for him who shall have borne the battle, and for his widow, and his orphan.” Today we have no credible plan to make good on this promise. Because the VA budget has a large “mandatory” portion (in the form of disability benefits), its budget will continue to grow automatically as claims rise, even if Congress were to rein in discretionary items. In this sense, it is an entitlement program like Social Security and Medicare. While there are always pressures to cut unfunded entitlements, veterans’ benefits are in some ways different from Medicare and Social Security because these benefits are actually “deferred compensation”—payments for services already rendered by defending and fighting for our country.

While much political energy is devoted to ensuring the long-term viability of other entitlement programs, our leaders are almost completely silent on how to pay for the accrued benefits we have only recently promised to veterans. Kicking the can down the road will put veterans’ funding in competition with all the other future claims on federal tax dollars—including paying back the trillions of dollars of debt we incurred to finance the wars in the first place.

The solution is to establish a Veterans Trust Fund that will provide funding to pay claims as they come due. We already have more than 100 such federal trust funds, of which the best known are Social Security (Old-Age and Survivors Insurance and Disability Insurance trust funds) and Medicare (Hospital Insurance Trust Fund), which are funded by payroll taxes from employers and employees, and interest on their balances. Others include the Unemployment Trust Fund, the federal government employee retirement trust fund, the Highway Trust Fund, and the military retirement fund (for those who serve in the military for at least 20 years).

From a certain perspective these may be viewed as simply an accounting gimmick, because all tax dollars are fungible. The merit of establishing a trust fund for veterans, however, is that it creates an awareness of the magnitude of the funding challenge ahead. Today’s taxpayers need to shoulder some of this burden. So far we have avoided almost the entire fiscal toll of paying for our 14-year-long military odysseys in Iraq and Afghanistan. Previous wars—from the War of 1812 through World War I and right up to the first Gulf War—were all accompanied by higher taxes. By contrast, tax rates were cut in 2001 and again in 2003; nearly all Americans now pay lower taxes than they did before we invaded Afghanistan and Iraq. Instead, we borrowed the money needed to run these wars, shifting the full cost to the next generation.

The consequences of essentially ignoring the cost of caring for veterans are threefold. First, it understates the true cost of going to war. Second, it is poor financial management to be paying for a 40-year-long pension and benefit obligation from annual budget revenues. Third, it inevitably will lead to the possibility that veterans’ needs will not be funded adequately in the future. But the issue here is not merely fiscal. A widening gap has opened between the tiny percentage of the American population from whom the bulk of the nation’s volunteer army is drawn and the rest of us, who have neither served nor borne the financial burden of the conflict. The morally right choice is to pay for the Veterans Trust Fund through higher taxes. Raising the top marginal rate of federal income taxes to 45 percent or so over the next decade would probably be sufficient. This is far below the maximum level of income taxes levied after World Wars I and II, which reached 77 percent in 1918 and 94 percent in 1944-45.

If the politics of passing a tax increase prove too difficult, we could start the fund by imposing a surcharge (say, 20 percent) on all future war spending, designated for the Veterans Trust Fund. For example, the Obama Administration has requested $50.9 billion in dedicated war funds; the surcharge would require that $10 billion be added to begin a Veterans Trust Fund.

Such a measure would only begin the process of setting aside money for the long-term costs of war, but it would establish the right framework. More importantly, it would force us to confront the long-term financial burden of today’s wars and demonstrate tangible support for our troops that goes beyond buying bumper stickers.

From the Symposium

16 for ’16

With electoral thoughts dancing in our heads, we asked contributors to give us one idea—targeted, straightforward—for the next administration to pursue.

Austan Goolsbee & Newton Minow on a new Morrill Act • Anne-Marie Slaughter on reforming our national security bureaucracy • Juliette Kayyem on rethinking disaster relief • Marc Mauer on a 20-year maximum for prison sentences • and much more


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Linda J. Bilmes , the Daniel Patrick Moynihan Senior Lecturer in Public Policy at the Harvard Kennedy School, is a former assistant secretary and chief financial officer at the U.S. Department of Commerce. She serves on the U.S. Department of Labor’s Advisory Committee on Veterans’ Employment, Training, and Employer Outreach and on the board of directors of the Institute for Veterans and Military Families. She has written extensively on veterans’ issues and is co-author (with Joseph Stiglitz) of The Three Trillion Dollar War.

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