What’s the matter with the federal disability insurance program?

The White House last week released a report about the current and future condition of Social Security Disability Insurance. The report covers a variety of details about the federal disability insurance program, but the section that jumps out the most is this—the trust fund for the program will be unable to pay full benefits beginning next year. According to the report, benefits could drop by 19 percent if action isn’t taken.

How did the program get to this point? Some researchers and policymakers are concerned that it has become too generous, thus increasing the burden on the trust fund. Perhaps it shouldn’t be a first concern given the financial state of the trust fund itself.

But first, lets turn to the evidence that the program is too generous. Research looking at the rise in disability insurance outlays has analyzed a variety of potential sources of this increase. Economists Mark Duggan, now of Stanford University, and Scott Imberman of the University of Houston, explore a variety of potential causes in a book chapter on the subject. They find that the aging of the U.S. population, changes in health among workers, economic conditions, the increasing replacement rate—the ratio of disability income to overall U.S. labor income—offered by the program, and an expanding definition of disability are the main culprits.

The wider definition of disability – the largest factor according to Duggan and Imberman – might not be unaffected by other trends. Some judges in disability cases might be slightly more willing to grant disability to marginal applicants, as seems to have happened in West Virginia recently, but we have to ask where these marginal applicants are coming from. The economy may be interacting with this factor as well. A worker with a qualifying disability who is able to find a job during a healthy labor market may find it much tougher to find one in a down labor market. Research from University of California-Berkeley economist Jesse Rothstein finds evidence for this: Disability applications increase when the unemployment rate does.

But what about some of the other factors they highlight? The replacement rate for Social Security Disability Insurance is on the rise not because of a concrete policy action, but rather due to the increase in income inequality over the past several decades. As the wages of workers at the top pulled away from those in the middle and at the bottom of the income spectrum, the replacement wage for those declared disabled has increased, while the actual wages for those on the middle and bottom rungs of the earnings ladder stagnated. This happened because the formula sets the level of disability income based on overall income. If low-end wage growth lags significantly behind overall growth, then the base will increase relative to low-end incomes. The program was built assuming wage growth would be widely shared. But it hasn’t been, leading to a rising replacement wage.

On the issue of aging, it’s possible that Duggan and Imberman are underestimating the role of changing demographics. Harvard University economist Jeffrey Liebman notes that the disability rate adjusted for the age of the population has been essentially flat for men since the 1990s, while the rate for women is catching up to levels similar to men. This means that increasing rates of qualifying for disability insurance is driven quite a bit by changes in demographics. Liebman also points out that the Congressional Budget Office projects that spending on disability insurance will decline as the Baby Boom generation reaches the age when they can claim retirement benefits from Social Security.

Let’s now move to the two authors’ finding that disability insurance has become a long-term unemployment program for some workers due to expanded definitions of disability. To the extent this is true would mean that some workers are qualifying for disability insurance and then dropping out of the labor force. A sign of how severe of a problem this is would be how large the decline in the U.S. labor force participation rate would be due to disability.

Economist Monique Morrissey at the Economic Policy Institute shows just how small of a dent in the participation rate disability insurance makes. Using research from the RAND Corporation and the Social Security Administration, Morrissey calculates that if workers who could hypothetically make more than the Social Security Disability Insurance threshold for earnings were denied access to the program, then the participation rate would increase by only 0.2 percentage points. Not exactly a large jump in the rate.

All this isn’t to say that the program itself isn’t in need of some reform, but it’s the long-term financing of the trust fund that is most in need of help. Social Security Disability Insurance shouldn’t be treated as an overly bloated program that’s sowed the seeds of its own destruction. As Liebman puts it in his paper, perhaps the more fruitful avenue is retooling the program given the kinds of workers that now apply for disability.

July 22, 2015


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