Averting the Disability-Insurance Meltdown

The out-of-control $150 billion program is in urgent need of reform.

DesabiliytSometime next year Social Security’s $150 billion disability-insurance program will become insolvent. The program, which offers income supplements to those who cannot work full time due to physical or mental disabilities, has buckled as the number of beneficiaries has soared to more than 11 million in 2014, from 3.8 million in 1984. The bipartisan Social Security Advisory Board has urged reforms.

Yet the Obama administration’s 2016 budget proposes the opposite of reform: an unconditional transfer of revenues from Social Security’s retirement program. The president’s proposal will likely be blocked thanks to a House budget rule that forbids unconditional revenue transfers. The question now is: Will serious reform be a reality under President Obama?

Americans today are about as likely as those in the past to report that they have a work-limiting disability, according to Census Bureau data. For instance, 5.6% of Americans ages 35-44 reported having a work-limiting disability in 1984, while in 2014 that figure was 5.4%. Likewise, self-reported measures of overall health have improved and workplace injuries have fallen.

Yet the percentage of the working-age population collecting disability insurance benefits has more than doubled to 5.7% in 2014 from 2.7% in 1984. These increases were not anticipated: In 1984 Social Security’s trustees projected only 4% of working-age adults would collect disability in 2015.

Demographic factors have played a major role. Older workers are more likely to become disabled, and as more women entered the labor force in the 1970s and 1980s, they began receiving benefits alongside men.
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Photo: Getty Images

But there is more than demography at work. Congress loosened eligibility standards in 1984, allowing multiple non-disabling ailments to be combined to qualify for disability benefits. The legislature also ordered the Social Security Administration to favor evidence provided by an applicant’s medical representatives over the judgments of SSA medical professionals.

Once Congress opened the door, incentives pushed many individuals through it. For less-educated workers, the typical annual disability package of almost $15,000 in cash payments and another $9,000 in Medicare benefits—coupled with the ability to earn more than $13,000 from work without losing benefits—can be attractive. High-school dropouts are one-half to two-thirds more likely to apply for disability than college graduates, regardless of health status, according to a January study published by economist Courtney Coile of Wellesley College.

Most individuals who begin receiving disability will never return to the workforce. In any given year less than 1% of beneficiaries leave to return to work. Yet research published by the Social Security Administration, the Rand Corp. and others has shown that many have at least some capacity to work. Columbia University economist Til von Wachter and his co-authors found in a 2008 study that about 50% of rejected disability applicants age 30-44 return to work. For these reasons, the bipartisan Social Security Advisory Board in 2006 urged reforms “directed to self-support, independence, and contribution.”

The administration wants to buy time while Congress develops a long-term solution. But time may be the enemy of reform: The topic is being discussed only because the trust fund will run out in 2016. The administration’s plan would reallocate $350 billion in Social Security retirement revenues to the disability trust fund over five years, which would delay insolvency until 2033. That would delay reform for a generation.

In 1994 Social Security’s trustees proposed reallocating revenues to disability insurance, contingent upon “a thorough policy review of the program.” Tax reallocation, the trustees said, “should be viewed as only providing time and opportunity to design and implement substantive reforms that can lead to long-term financial stability.” Yet reform never happened.

And here we are again. Reallocation alone, the trustees warned in a 2014 report, “might serve to delay DI reforms and much needed financial corrections.” Note that the trustees include the secretaries of Treasury, Labor and Health and Human Services, the acting Social Security commissioner and two public trustees, all of whom were appointed by President Obama.

If the House sticks to the rule it passed in January—which allows revenue transfers only when coupled with other measures—the administration might be forced to accept substantive reforms. The administration’s budget proposes trial policies such as rehabilitative services for the disabled before they can claim benefits, along with incentives for employers to retain workers with disabilities. Turning those limited trial programs into broader requirements could form the foundations of lasting reform.

Using similar policies, countries such as the Netherlands—once a disability basket-case—reduced the inflow of disability beneficiaries by 60% in six years. The Netherlands lowered taxes for employers who can keep the disabled on the job. The Dutch reforms also required that all workers considering applying for disability first construct a rehabilitation plan with their employer and be able to show that they have followed through on it.

The U.S. should explore similar options. The country can’t afford to paper over the need for reform once again.

Mr. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.
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