By LESLIE SCISM and JON HILSENRATH
The unexpectedly large number of American workers who piled into the Social Security Administration’s disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.
Signs of the problem surfaced Friday, in a dismal jobs report that showed U.S. labor force participation rates falling last month to the lowest levels since 1979, the wrong direction for an economy that instead needs new legions of working men and women to drive growth and sustain a baby boomer generation headed to retirement.
Michael Feroli, chief U.S. economist for estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.
The unemployment rate in Friday’s report fell to a four-year low of 7.6%, which most times signals job growth. This time it reflected workers leaving the workforce, a problem that could persist: Economists say relatively few people are likely to trade their disability checks for paychecks, in part because the program doesn’t give much incentive to leave.
Former truck driver James Ottesen, who began receiving monthly payments in 2009, said, “I’m not real happy” about being on disability. “It kind of reminds me of welfare.” He said he would “like to get re-educated to do something” because “my body is broke but my mind is not.”
But even if the 53-year-old Ohio man learned of a job he could do with herniated discs, he said, the government disability program feels like “a blanket covering you, and to walk out from it…at my age, it’s a little intimidating.”
Federal Reserve Chairman Ben Bernanke has worried that the financial crisis would lead to a permanent loss of workers, setting up what economists call hysteresis, a term borrowed from physics to describe temporary market changes that lead to permanent economic losses.
It is no longer a theoretical problem, said David Autor, a professor at the Massachusetts Institute of Technology, who has studied the disability program. The economy has a case of hysteresis, he said, created by the permanent transfer of workers to disability rolls.
Many newcomers to the disability roster are low-wage earners with limited skills, Mr. Autor said, and they are “pretty unlikely to want to forfeit economic security for a precarious job market.”
Payments, tied to a worker’s wage history, average $1,130 a month, which totals $13,560 a year. That is about $2,000 a year more than the federal poverty level for a single person and about $2,000 less than full-time wages at the federal minimum of $7.25 an hour. After two years, people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.
Between December 2007, when the recession started, and June 2009, when it ended, the number of Americans receiving federal disability benefits grew to 7.6 million from 7.1 million. Then the rolls swelled, reaching 8.9 million in March, about 5.4% of the civilian workforce ages 25 to 64, according to J.P. Morgan estimates. That compares with 1.7% of the U.S. workforce in 1970.
Economic growth is driven by the number of workers in an economy and by their productivity. Put simply, fewer workers usually means less growth.
Since the recession, more people have gone on disability, on net, than new workers have joined the labor force. Mr. Feroli estimated the exodus to disability costs 0.6% of national output, equal to about $95 billion a year.
“The greater cost is their long-term dependency on transfers from the federal government,” Mr. Autor said, “placing strain on the soon-to-be exhausted Social Security Disability trust fund.”
Last year, Social Security paid nearly $137 billion to 8.8 million disabled workers and 2.1 million of their spouses and children; related Medicare costs were about $80 billion. Program trustees estimate that by 2016, Social Security won’t be able to pay all of its disability claims.
In past recessions, discouraged workers dropped out of the labor force but returned when the economy picked up steam. About two-thirds of Americans ages 16 and older were either working or looking for work at the start of the current recovery in 2009.
But rather than expanding, the proportion of workers has since fallen to 63.3%, according to the government’s March statistics, released Friday.
With overall participation down, the labor force—a measure of people working and people looking for work—is barely growing. In March it was up just 0.2% from a year earlier and has grown by just 318,000 people since the recession ended in June 2009 to 155 million workers. In the decade before the recession, the labor force grew on average by 1.2% per year.
Some lawmakers and public-policy analysts are calling for an overhaul of the disability program. Senate and House panels held hearings last year addressing shortcomings, including the failure to return more people to work.
The White House released details of its proposed budget Friday that called for closing loopholes that allow people to collect full disability and unemployment benefits over the same period.
The federal program provides a safety net to workers with severe illnesses and injuries. To obtain an award, workers must prove they haven’t worked substantially for at least five months, and Social Security must determine that a medical impairment will prohibit work for at least a year.
With an expanded list of disabilities added by Congress in 1984, more than half of people awarded benefits now qualify because of musculoskeletal problems—including back pain—mood disorders and other mental problems, according to Social Security data. Such claims can take a year or more to assess because of their often-subjective nature.
Economists have found that more people apply for disability during periods of high unemployment, partly because they can’t find work. Ailments they might endure during good times are instead used as an avenue out of the labor force.
The economic downturn drove about 2.2 million additional applications for disability, relative to what would have occurred in the absence of the slump, according to estimates by Mark Duggan, an economics and public-policy professor at the University of Pennsylvania’s Wharton School, who has co-written research on the disability program with Mr. Autor.
About one million of those applicants likely remain out of the labor force, either because they got benefits or their applications were pending, Mr. Duggan said. Private disability insurance returns workers in far greater proportion.
In recent years, about a third of applicants have been accepted at the initial stage, which typically takes more than four months. Those rejected can appeal to administrative law judges for decisions that can take nearly two years, according to Messrs. Duggan and Autor.
With the economy improving, the disability roster is now expanding at a slower pace, though many economists expect its share of working-age people to continue growing.
The boom in disability is part of a longer-term trend that places the burden of economic casualties on the federal government. Some states use the program to reduce welfare costs, according to congressional testimony last year by David Stapleton, director of the Center for Studying Disability Policy at nonpartisan consulting firm Mathematica Policy Research.
States save money when federal disability checks replace state-paid benefits. Workers on federal disability also can switch from state-supported health insurance programs—such as Medicaid—to Medicare, he said.
The nation’s burgeoning disability roster stems partly from the aging workforce: Baby boomers’ bodies are breaking down, and some economists believe that the problem will level off once they reach retirement.
But boomers aren’t the only ones seeking help, Of the nearly nine million former workers receiving federal disability payments, more than 2.5 million are in their 20s, 30s and 40s.
“It is difficult to overstate the role that the SSDI program plays in discouraging” employment among these young people, Messrs. Autor and Duggan said in one of their research papers, urging reform.
With its origins in the 1950s, the government disability program has for decades paid little attention to getting people back to work, largely because when it was created, medical treatments rarely improved the prospects of older factory workers in physically demanding jobs, the professors noted.
In 2011, the latest data available, fewer than 0.5% of beneficiaries left disability rolls to work again. Most leave the program by advancing to the Society Security retirement program, or they die.
The Social Security Administration has run an initiative since 1999 called Ticket to Work that offers vocational rehabilitation, career counseling and job-placement help. But the Government Accountability Office, the investigative arm of Congress, has repeatedly faulted the agency for failing to substantially boost participation: About 3% of those eligible were enrolled, a 2011 GAO study found.
Social Security Chief Actuary Stephen Goss said in an interview that the agency, by law, was geared toward providing “benefits to those with a longer-term, by-and-large permanent disability.”
Social Security is committed to improving Ticket-to-Work, he said. In general, he said, his administrators are doing “a very good job with the staffing and resources that are available,” given the surge in applications after the financial crisis.
Some disability experts suggest the government try tailoring special services and training for applicants most likely to return to work. “Right now, we have an income benefit that is not based on what you can do,” said David Mann, a Mathematica researcher.
Mr. Mann, age 30, said many disabled people can work with the right help, and he included himself. Paralyzed in a diving accident as a teenager, he graduated from Princeton University and earned a doctorate in economics from the University of Pennsylvania. He uses a motorized wheelchair to navigate Mathematica’s Princeton, N.J., offices.
Social Security administrators have been unable to keep up with periodic medical evaluations of SSDI beneficiaries, according to the program’s inspector general. The backlog of required assessments shrank last year to 1.3 million people from 1.5 million, according to government data.
Such medical reviews in 2011 found 23,271 people able to return to work out of more than 345,000. The inspector general estimated that overdue medical reviews between 2005 and 2011 cost taxpayers $1.9 billion to $3.7 billion in benefits that shouldn’t have been paid.
Mr. Ottesen used to drive trucks for a Cincinnati produce business until he flunked a job-required physical exam and lost his job. He said he had been driving despite his back pain.
He was initially denied federal disability benefits, and, like many applicants, he hired a lawyer, at government expense, to appeal.
Social Security pays for such legal help, based on the idea that experts help move cases faster, helping hold down the application backlog. Last year, Social Security paid $1.4 billion in fees to disability advocates.
After Mr. Ottesen was approved for a monthly disability payment of about $1,100, he considered looking for another line of work, he said, but “I don’t know anything but driving a truck.”
A version of this article appeared April 8, 2013, on page A1 in the U.S. edition of The Wall Street Journal,