How to Fix Disability Insurance
This article is excerpted from How to Fix Disability Insurance, National Affairs, Issue Number 23, Spring 2015.
In late 2016, right around the time we elect the 45th president of the United States, we are due for our first entitlement crisis in two decades. That's when the actuaries in the Social Security Administration project that the Disability Insurance Trust Fund will be depleted. That trust fund — a pool of U.S. Treasury securities purchased with past excess payroll-tax revenue — helps pay for the benefits provided by the Social Security Disability Insurance program now that current payroll-tax revenues are no longer sufficient to cover the program's cost. SSDI insures most American workers and their families against the risk of a long-term illness or injury that would prevent them from working.
If the Disability Insurance Trust Fund is exhausted, we will be in uncharted territory. The Social Security Administration would be statutorily prevented from paying out full benefits on schedule, meaning that benefits received will, in total, be less than promised. Payroll-tax revenue would cover just 81% of scheduled benefits. At the same time, SSDI beneficiaries would be legally entitled to receive full benefits, setting up a dilemma that would probably end in a rushed legislative fix or legal action by beneficiaries.
Legislatively, it could be a relatively simple matter to extend the solvency of the DI Trust Fund by, for instance, reallocating payroll taxes between SSDI and the Social Security retirement program. But doing so would ignore SSDI's more fundamental problems.
SSDI was intended as a program to support those struck with health conditions or injuries that make working difficult or impossible. It continues to serve that vital role. But it has also become a permanent dole for a rising number of adults with limited earning potential who clearly are physically able to work. Reforming SSDI could both slow the growth of program spending and ensure the responsible stewardship of program funds. It could also boost economic growth by reducing federal budget deficits and increasing employment. But most important, SSDI reform could promote personal responsibility and help those who would benefit in the long run from continuing to work, even as it offered a stronger private safety net for older men and women.
The SSDI program was created in 1956. It promised benefits to workers between the ages of 50 and 65 who were disabled. In 1957, around 0.2% of adults received SSDI benefits. Over the next ten years, eligibility was extended to workers under age 50 (and subsequently loosened for workers age 30 or younger), and temporarily disabled workers became eligible. By 1970, about 1.6% of adults between the ages of 25 and 64 were on SSDI.
The Disability Benefits Reform Act of 1984 — along with regulatory changes in response to court rulings — cemented the liberalized SSDI program that we have today. Receipt of SSDI benefits began a long climb, slowly at first, then accelerating by the end of the decade, to the point where 5% of adults in 2012 were on the program.
Not just anyone is eligible for SSDI benefits. To qualify, applicants' work histories are assessed along with their health. Generally, an applicant must have worked in a job covered by Social Security in at least one calendar quarter in every year after turning 21 years old and before the year of disability onset. Alternatively, someone having worked in a covered job for 40 quarters (ten years) is also eligible. Furthermore, the person must have worked at least 20 calendar quarters during the 40 quarters (ten years) preceding the disability. (The requirement is looser for younger workers.) Today, nearly three-quarters of men between the ages of 20 and 64 are covered by SSDI, as are two-thirds of women.
Nearly nine million former workers received SSDI benefits in January 2015, up from fewer than three million in 1980. Adding the spouses and children of former workers raises the total number of beneficiaries to nearly 11 million. In 2012, SSDI cost $140.3 billion, which was 3.2 times the 1980 level after adjusting for inflation. Add in the cost of Medicare benefits for SSDI recipients, and the 2012 total increases to $208.6 billion, or 3.6 times the 1980 level. While the SSDI program as a whole has never been insolvent, program spending has exceeded revenues since 2009, requiring that trust-fund assets be drawn down. That is to say, SSDI has depended on general federal revenues for the past six years.
Against this backdrop, SSDI reform should be driven by six goals. First, there is the immediate imperative of shoring up the DI Trust Fund. Many liberals are resistant to fundamental SSDI reforms that would seek to reduce the long-term costs of the program; they would prefer to simply reallocate the two Social Security payroll-tax rates (for retirement and disability benefits) and be done with reform. SSDI's long-term solvency could be assured by permanently raising the DI payroll tax by 0.4 percentage points. The Obama administration's fiscal year 2016 budget has proposed increasing that tax from 1.8% to 2.7% from 2016 through 2020 and reducing the Old Age and Survivors Insurance payroll tax (which funds Social Security retirement benefits) by the same 0.9 percentage points. According to the SSA Office of the Chief Actuary, this reallocation would leave both trust funds solvent until 2033 (which moves the OASI insolvency date up by one year).
A second goal of SSDI reform should be to expand the support options available to able-bodied men and women who can work, harnessing the benefits of markets and demanding personal responsibility. SSDI should not be an early-retirement program for people who don't want to work or even a long-term-unemployment program for those who have fallen on hard times.
A third goal of SSDI reform should be to reduce the number of Americans applying for benefits. One way to do this would be to increase employer incentives to take two kinds of steps: adopt safety measures that would prevent workers from becoming disabled and to accommodate and rehabilitate disabled workers rather than directing them to SSDI. When employers pay for insurance covering risks faced by their employees, it may be rational for them to expend less effort preventing covered events or deterring employees from filing claims. These perverse incentives can be thwarted by making insurance rates reflect the cost of claims filed by those the employer insures. For this reason, private disability insurance, state workers' compensation programs, and the state-federal unemployment-compensation program all rely on "experience rating" for determining the premiums or tax rates levied on employers. Through experience rating, employers whose workers have more disabilities, accidents, or layoffs pay higher rates than employers with lower insurance payouts.
Another way to reduce the number of SSDI applications is to make it less likely that applicants will be awarded benefits if they do not meet a strict definition of disability. That should be the fourth goal of SSDI reform. There are a number of changes at the initial stage of determination that would serve this goal.
The fifth goal of SSDI reform should be to make it less attractive and more difficult to receive benefits from the program for those who, while impaired, are able to work. Currently, upon being awarded benefits, new claimants are assigned a designation based on how likely it is that their medical condition will improve. These categories determine how often beneficiaries are reviewed for eligibility. Coburn would modify the categories and require beneficiaries in the least-severe one — those with a condition expected to improve within two years — to reapply for SSDI after three years. (They could initiate the new application before the three years are up, so that there would be no gap in payment if they were reapproved.)
The sixth and final goal of SSDI reform should be to facilitate work among those with serious impairments who nonetheless would like to work. SSDI currently has several features that promote work. Beneficiaries can receive earnings above the statutory limit in nine months over a 60-month period without losing any benefits. After that, they enter a 36-month period during which they can receive SSDI benefits in months where their earnings do not exceed the statutory limit, and they can receive Medicare benefits for 93 months regardless of their earnings. They can purchase Medicare at a reduced premium thereafter. If they end up out of work within five years of their SSDI benefits ending, they enjoy an expedited reapplication process and time-limited benefits upon approval.
In addition, the SSA has, over the years, tested several approaches to encouraging work and independence through demonstration projects. However, the results of all of these efforts have been disappointing. Only one in 200 SSDI beneficiaries earns above the statutory limit. Cato Institute economist Jagadeesh Gokhale has convincingly argued that a fundamental problem with all the incentives tried so far is that beneficiaries fear losing their SSDI and Medicare benefits if they work while in the program and fear that they will need SSDI again in the future if they work enough to be removed from the program.
The SSDI program is a crucial component of the federal safety net. It protects workers from unforeseeable and catastrophic health shocks that prevent them from working. If we were starting with a blank slate and could choose any option for insuring against long-term disability, we might eschew social insurance for more market-based solutions. As it is, however, the politics of disability reform means we are stuck with the current behemoth that is SSDI, which costs the federal government about as much at this point (when including its Medicare costs) as public housing, food and nutrition assistance, the school-lunch program, and cash welfare for non-disabled families combined.
The looming insolvency of the DI Trust Fund offers a rare opportunity to fundamentally reform SSDI in order to ensure its financial sustainability, better target assistance to those with debilitating impairments, help them if they want to work, arrest excess growth in program spending, and encourage able-bodied workers to self-insure against the risk of long-term unemployment. The welfare reforms of the 1990s constitute a remarkable success for conservative reform of the means-tested safety net, and SSDI presents a similar opportunity for reform of social-insurance programs.
As with the earlier welfare reforms, we have a chance to demonstrate that a fiscally viable, smaller safety net that promotes personal responsibility and reflects the value of work and independence can be more beneficial to 21st-century Americans experiencing hardship than the unaffordable and inefficient 20th-century approaches that are the legacy of the New Deal and the Great Society.
Scott Winship is the Walter B. Wriston Fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.
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