The Economist Gets It Wrong on Disability Insurance: Hoisted from the Archives from Two Years Ago

Kathy Ruffing: The Economist Gets It Wrong on Disability Insurance: “A recent article in the Economist took an uninformed–and unjustified–swipe at Disability Insurance…

…The Economist notes that the average disabled-worker benefit is about $1,130 a month, and its accompanying graph suggests that this figure has almost doubled since 1990.  That’s seriously misleading. When adjusted for inflation, the average benefit has barely grown…. The Economist also remarks that the number of DI recipients has roughly doubled since the mid-1990s.  But that’s largely due to the aging of the population (the baby boomers have aged squarely into their high-disability years), the growth of women’s labor-force participation (which means that more of them qualify for DI if they become disabled), and the rise in Social Security’s full retirement age from 65 to 66 (which delays beneficiaries’ switch from disability to retirement benefits). As we’ve explained, adjusting for these factors reveals that the disability rolls have grown only modestly.

My view is that Kathy Ruffing is correct, for my spirit guide on these issues is Michigan’s John Bound:

John Bound et al.: The Welfare Implications of Increasing DI Benefit Generosity: “The empirical literature on DI has primarily focused on the impact of program parameters on caseload growth…

…or reduced labor force attachment. The focus on the efficiency costs of DI provides a misleading view of the social desirability of the program itself and of the adequacy of benefit levels. In order to provide a more comprehensive view, we develop a framework that allows us to simulate the benefits as well as the costs associated with a marginal increase in benefit generosity using a representative cross-sectional sample of the population.

Using the 1991 March CPS, we estimate the total cost of providing an additional $1 of income to current DI recipients to be $1.42. While the load factor due to moral hazard is fairly high, we demonstrate that it is moderate enough that representative workers should be willing to ‘buy’ additional insurance through reduced take-home pay at this price…. [Note that] due to the redistributive nature of the program… [such a] reform leads to a net welfare loss for… more highly-educated groups…. The expected utility gain also turns negative for high school dropouts under high levels of risk aversion… [if] individuals with income below the floor provided to current DI recipients help to finance the benefit increase… http://hdl.handle.net/2027.42/50596

Translated into English, what John Bound et al. are saying is:

  • If purged of adverse selection–which is what bringing disability insurance from the private marketplace into the social insurance system does–representative workers seeking to maximize their utility would be happy to vote for such a program because the social insurance provides value to them.
  • The top of the income distribution, however, would not like it because of its redistributive effect.
  • And the bottom of the income distribution would not like it because it is for them not utility-increasing insurance but rather a utility-decreasing lottery: they are better off if they get SSDI.

This last seems to me to be wrong (sorry, spirit guide). Somebody who becomes disabled thereby transitions to a much lower utility level, and I cannot make the numbers work to see it as a lottery rather than as insurance for the poor.

September 17, 2015

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