Every year, when the trustees of Social Security and Medicare publish their report on the programs’ finances they set off a round of partisan bickering about the solvency of the twin programs covering pensions and health care for retired Americans.
Andrew Harrer/Bloomberg News
The trustees gave an update on the financial outlook of Social Security, Medicare and disability insurance at a briefing on Monday.
Enlarge This Image
Every year, a vitally important issue gets lost in the din: disability insurance payments, which account for almost $1 out of every $5 spent by Social Security, are growing out of control.
Disability insurance takes too many workers out of the job market prematurely. It reduces their lifetime income and, to top it off, slows economic growth. Yet in contrast to the heated arguments about Social Security and Medicare, fixing the disability problem inspires hardly any discussion.
The trustees reported Monday that the government made $128.9 billion in insurance payments to 10.6 million disabled workers and their family members last year, 25 percent more than it received from payroll taxes.
On top of that, five million adults received $33 billion worth of disability benefits from the Supplemental Security Income program for poor Americans. Medicare spent more than $90 billion on benefits for disabled workers, who are eligible for the government health insurance after two years on disability, regardless of their age. And Medicaid spent $110 billion more on the poor disabled.
The disability program offers essential support for disabled workers – many of whom have no chance of holding another job. Some of its growth reflects changes in the population: we are growing older and becoming fragile with age. Similarly, disability rates among women should be expected to rise because more of them entered the work force.
But these factors account for only a small share of the growing cost. They fail to explain why the rolls of the disabled are expanding rapidly for men of all ages, even though Americans are generally in better health.
“The health of nonelderly Americans is improving consistently, and we have more technology to help people at work,” observed Mark Duggan, an economist at the Wharton School of the University of Pennsylvania who has advised Social Security on the assumptions underpinning the trustees’ forecasts. “Yet every year the fraction of people on this program is growing.”
The breakneck growth in the disability program is not simply about demography. Rather, it is driven by two other factors: a job market that has become tough to navigate for workers with low skills, especially men, whose jobs have gone abroad or been taken by machines; and a basic flaw in the disability program that discourages people from ever working again.
In hard times, disability becomes an attractive alternative for unemployed people who might have toiled through back pain or depression if the job market were strong. A study of coal miners in Appalachia found that disability applications spiked when energy prices fell, underscoring how workers turn to the program as a response to layoffs. In 2009, when the unemployment rate rose to 10 percent, applications for disability jumped by a fifth.
The problem is that once someone goes on disability, it is extremely unlikely that that person will ever go back to work, regardless of job opportunities or medical condition. So disability can help turn a temporary stint of unemployment into a permanent condition.
The disability insurance program was meant for another era, in the late 1950s when working conditions were tougher and disabilities were expected to put an end to someone’s working life. It was hard to get into the program – for starters, it required applicants to be out of the labor force. Once a worker was accepted, nobody worried about trying to help him back into the work force. He was, after all, disabled.
In the mid-1980s, however, Congress softened the criteria. The Social Security Administration, which usually required medical diagnoses as proof of disability, was required to give more weight to subjective factors like pain. This opened the door for applicants who reported mental ailments like anxiety, or back pain and other muscular problems, claims more difficult to verify.
Collecting disability became even easier as rejected applicants were allowed to appeal before an administrative judge without anyone from Social Security present to defend its decision. So even though two-thirds of applicants were initially rejected, 50 to 60 percent ultimately joined the program.
And the rolls soared, outstripping population growth. There are 1.5 times more people on disability than there were in 1990. Almost one in 20 Americans from the ages of 25 to 64 now collects benefits, more than twice the share of two decades ago. And the cost has risen in tandem. Disability outlays have grown about 5.6 percent a year after inflation in the last two decades, compared with just 2.2 percent for other Social Security spending.
Though the intent was laudable, Congressional efforts to help disabled workers were short-sighted. Crucially, lawmakers failed to consider the long-term effect of easing entry to a program that would take many young workers out of the job market for good. Congress offered nothing to help recipients into less physically demanding work that might be appropriate despite their disabilities. It offered nothing for employers who kept hurt workers in a job.
The trustees said on Monday that the disability fund will be exhausted by 2016, two years earlier than they estimated last year. Disability payments won’t stop. But once the fund is depleted, a bigger share of payroll taxes will be diverted from the fund that pays benefits to old age pensioners and their survivors.
The growth in disability payouts has other drawbacks. The payments hardly provide a living, at just over $1,100 a month, on average, plus Medicare coverage. Beneficiaries are allowed to earn up to about $1,000 more, but only about one in 10 makes any extra money. Though disability might offer a needed respite now, with unemployment exceeding 8 percent, keeping productive people out of work will harm the economy in the long run.
The good news is that the disability program is easier to fix. Unlike Social Security and Medicaid, whose financial strains are driven mostly by demographic forces, the disability program suffers from artificial woes that can be corrected. Fixing the system requires providing incentives to enable disabled workers to continue working if they can.
This doesn’t mean slashing benefits. But it does mean offering incentives so that disability is no longer the first, most desirable choice for an unemployed worker with a back problem. Mr. Duggan and David Autor of the Massachusetts Institute of Technology have suggested several ways to do this.
For instance, employers who send lots of workers into the disability program pay no more into the system than those who send none. This could change if employers were required to buy private insurance, whose premiums increase as more workers draw benefits. The public system’s finances would improve. And bosses would have an incentive to change working conditions or add rehabilitation programs to keep workers with physical and mental ailments on the job.
The disability program could also let workers apply for benefits while still working – encouraging them to take a less demanding job at a lower wage. And requirements to join the system could be tightened, including closer monitoring of recipients to check for improvements.
Despite growing concern about the budget deficit, nobody seems to have noticed disability’s billion-dollar inefficiencies. To be fair, disability payments create a barrier that politicians find hard to breach, lest they appear heartless and unfair by slowing enrollment and moving some people off payments.
Still, disability payments are not an effective solution to long-term unemployment. A good response might be a more generous form of earned income tax credit for adults with no dependents, something that would encourage disabled beneficiaries to work. And the system itself could be reconceived as a way to help the disabled cope in the job market and leave it only when they must.
The Americans With Disabilities Act of 1990 argues that the nation must assure disabled citizens with “equality of opportunity, full participation, independent living, and economic self-sufficiency.” Disability insurance does not live up to this standard.
Source: NY Times, “Disability Insurance Causes Pain”, Eduardo Porter, April 24, 2012
Click on this link to learn more.