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Fiscal Fix Should Include Disability Reform

By the Editors
January 07, 2013 6:30 PM EST
Disability
Disability

The conversation in Washington is shifting from taxes to entitlement spending and, in particular, how to slow the unsustainable growth of Social Security and Medicare.

Central to that discussion should be an overhaul of Social Security Disability Insurance, a vital safety-net program for millions of disabled workers. It has gotten too big and too costly. Worse, it has shifted the incentive for those with physical impairments to choose government dependency over work. Oh, and it will be insolvent in three years if nothing is done.

The program’s $124 billion annual cost is nine times what it was in 1970. Its ranks have swollen to more than 10 million beneficiaries in 2011, or 4.5 percent of the working-age population, up from about 1.3 percent in 1970.

Workers who enter the disability system rarely leave. The Social Security Administration reviews only a tiny fraction of cases each year to determine which beneficiaries still meet the eligibility criteria. Rather than help people manage their disabilities so they can rejoin the labor force, the 1960s-era program cultivates dependency by guaranteeing health insurance and an income for life. The surest way to lose benefits is by getting a job, because monthly income above roughly $1,040 results in dismissal from the program.

Employer Incentives

So how did we get here?

Disability rolls have swelled partly because of rising female labor-force participation. But the numbers also surge during economic declines, suggesting that some of the jobless are turning to the more-generous disability program in lieu of unemployment insurance or other assistance. A 2002 paper by three economists showed that disability applications from the Appalachian coal-mining region increased when energy prices fell, and companies closed mines and fired workers.

Qualifying for benefits has also gotten easier since 1984, when Congress liberalized the rules by shifting eligibility from a list of specific impairments to consideration of a person’s medical condition and ability to work. Applicants with multiple maladies can qualify even if no single condition would meet the criteria, and symptoms of pain or mental illness are allowable in lieu of a clear diagnosis.

After the economy weakened in the late 1980s, the number of beneficiaries doubled from 1989 to 2009. That corresponded with a rapid increase in claims of musculoskeletal conditions and mental disorders, which now dominate the list of ailments.

One quick fix is to require the government to conduct more periodic screening to make sure beneficiaries are still unable to work. The Social Security Administration conducted 443,233 full medical reviews in 2011 -- less than 5 percent of all cases. Budget cuts have sapped funding for the reviews, which cost about $758 each, and created a backlog of about 1.4 million cases, according to Bloomberg News.

In fact, the Congressional Budget Office says increasing the number of disability reviews would lower overall spending, because some beneficiaries would no longer qualify. Boosting appropriations by $4 billion over the next decade would reduce outlays by $12 billion over the same period, according to the CBO.

A longer-term fix involves shifting incentives toward work and away from government support. Economists David Autor, of the Massachusetts Institute of Technology, and Mark Duggan, of the Wharton School at the University of Pennsylvania, propose that private disability insurance be extended to the majority of workers through their employers. The cost to a company would be tied to the rate at which its employees or, for a small business, that industry’s workforce, join the disability rolls.

Cost Incentive

Such a requirement would create a cost incentive for employers to accommodate workers with limited disabilities by offering vocational rehabilitation, moving workers into less physically taxing jobs or improving ergonomics when possible. A private system could also lengthen the waiting period for government support from the current five months to more than two years, depending on the policy.

Private insurance could replace as much as 60 percent of a worker’s income and cover workplace modifications and rehabilitation. Workers with severe conditions could move immediately to the federal disability system.

There are potential risks. Employers might be tempted to discriminate against disabled or older workers (although that would often violate federal law). Employers might also pass on the cost of premiums to employees in the form of lower wages, although the cost is expected to be relatively low, ranging from $150 to $250 annually, according to the authors.

The idea isn’t as revolutionary as it may sound: Five states currently require employers to provide temporary disability-insurance benefits. Some plans have been in place since the 1940s. A similar program in the Netherlands has had promising results: New disability cases fell 40 percent from 2002 to 2004 and by 50 percent from 2004 through 2006.

For decades, disability insurance has been an important safety net for the most vulnerable Americans. With entitlement reform finally on the table, Congress could make a few small fixes to ensure that the program keeps working for those who genuinely need it.

To contact the Bloomberg View editorial board: view@bloomberg.net.

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