America’s growing Social Security Disability problem

By Richard Burkhauser, American Enterprise Institute

The latest Social Security Administration data document that Social Security Disability Insurance (SSDI) rolls reached a record high of 8.85 million in March 2013, an increase of 1.6 million or 21 percent since the start of the Great Recession in 2007.

This recession-induced growth exacerbates the long time trend in SSDI program growth that has resulted in its real expenditures increasing sevenfold, from $18 billion (2010 dollars) in 1970 to $128 billion in 2010, a trend the CBO reports will result in program insolvency as early as 2016.

This long running disability epidemic, which hit its pandemic stage in the aftermath of the 2007 recession, has almost nothing to do with a decline in the overall health of working age Americans or in the severity of their health-based impairments. Rather, it is primarily the consequence of fundamental flaws in the SSDI program and its administration which have increasingly made it a long term unemployment program rather than the last resort transfer program for those unable to work due to their health-based impairments that Congress intended it to be. These flaws become most evident during severe during economic downturns but will remain long after we recover from the Great Recession.

Most SSDI growth is driven by its incentive structure and the increasing difficulty of its administrators to determine disability (as discussed in my recent book, co-authored with Mary Daly, The Declining Work and Welfare of People with Disabilities (AEI Press, 2011) and in our point-counterpoint debate article in The Journal of Policy Analysis and Management).

SSDI’s most fundamental structural flaw is its reliance on a flat payroll tax for funding which does not rise for firms whose workers disproportionately come onto SSDI rolls or fall for firms who take measures to instead keep them on the job. Hence firms have less incentive to accommodate or rehabilitate their workers at the most effective point for such treatments-when workers first experience a health shock that affects their ability to work.

Worse, an increasing share of workers coming onto the rolls are marginal cases. They might have been able to continue to work with an intervention at the very beginning. Instead, these workers make up the majority of new beneficiaries who are awarded benefits based on difficult-to-determine mental and musculoskeletal conditions or who have conditions that do not exceed the medical listing but are accepted based on vocational criteria (e.g. age, education, and work history).

The flawed program hurts millions of workers by forcing them to demonstrate they are unable to work before they can receive benefits. This stands in contrast to a program that partners with employers to intervene quickly, provide accommodation, and empower individuals with work impairments to remain engaged in work. Individuals who remain in the work force generally earn more than SSDI beneficiaries, while also benefitting from the social engagement and dignity that work can provide. For many beneficiaries, the cash and healthcare benefits of the program are poor replacements for continuing to work, and a timely intervention could make that possible.

Rather than focusing on removing those already on the SSDI rolls, it is time for Congress to consider more fundamental SSDI reforms that would better incentivize employers to provide workers with alternatives to an SSDI application when their impairment first occurs.

By experience rating the disability payroll tax to look more like Workers’ Compensation (WC), firms would have greater incentives to hire private sector long-term disability insurers to better manage their workers when they first experience the onset of a health related work limitation. This would lead to greater accommodation and rehabilitation and a reduction in SSDI applications. This “work first” policy makes far better sense than current SSDI policies where workers must demonstrate that they cannot work before being offered incentives to work once they are on the program.

Under a reformed system, like that of the Dutch, payments would be awarded only after workers try to return to work-and after their employers try to accommodate their work limitations. Because firms would more directly bear the costs of disability, directing their workers onto the SSDI rolls would become increasingly expensive and decreasingly desirable. This together with a tightening of the most highly subjective health condition criteria, especially mental and musculoskeletal conditions, would help SSDI administrators make decisions more consistently and reduce uncertainty about eligibility.

Not all persons with disabilities can work, so it is important to maintain a last resort SSDI program that provides protection for these workers. But the reality is that SSDI has increasingly become the first, rather than the last resort for many new SSDI beneficiaries. The program’s looming insolvency only increases the need for fundamental reform.

Richard Burkhauser is the Sarah Gibson Blanding Professor of Policy Analysis at Cornell University and an adjunct scholar at the American Enterprise Institute. you can read his book: The Declining Work and Welfare of People with Disabilitie. 

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