Social Security Disability Insurance and Misaligned Incentives

Chana Joffe-Walt has written a brilliant article on the rise of Social Security disability insurance (SSDI) in the United States, one of the most important, and poorly understood, developments in the U.S. labor market over the past three decades. David Autor has done essential work on detailing the origins of the dramatic increase in the disability rolls in recent years, and he co-authored a disability insurance reform proposal with Mark Duggan back in 2010. Joffe-Walt cites Autor extensively, and she also paints a vivid portrait of the living experience of disability insurance beneficiaries, focusing initially on one Alabama county in which 1-in-4 working-age adults enrolled in the program. My hope is that the clarity of Joffe-Walt’s prose helps spread the word about the importance of disability reform, which is for any number of reasons extremely politically challenging:

Part of the rise in the number of people on disability is simply driven by the fact that the workforce is getting older, and older people tend to have more health problems.

But disability has also become a de facto welfare program for people without a lot of education or job skills. But it wasn’t supposed to serve this purpose; it’s not a retraining program designed to get people back onto their feet. Once people go onto disability, they almost never go back to work. Fewer than 1 percent of those who were on the federal program for disabled workers at the beginning of 2011 have returned to the workforce since then, one economist told me.

People who leave the workforce and go on disability qualify for Medicare, the government health care program that also covers the elderly. They also get disability payments from the government of about $13,000 a year. This isn’t great. But if your alternative is a minimum wage job that will pay you at most $15,000 a year, and probably does not include health insurance, disability may be a better option.

But going on disability means you will not work, you will not get a raise, you will not get whatever meaning people get from work. Going on disability means, assuming you rely only on those disability payments, you will be poor for the rest of your life. That’s the deal. And it’s a deal 14 million Americans have chosen for themselves.

One of the most depressing aspects of the disability insurance program is the fact that it creates a strong incentive for children in low-income households to be diagnosed with a disability, as this will make the household eligible for Supplemental Security Income (SSI). The challenge, however, is that as Joffe-Walt explains, SSI and SSDI have essentially picked up the slack left behind by welfare reform, a development greatly exacerbated by misaligned incentives:

Part of Clinton’s welfare reform plan pushed states to get people on welfare into jobs, partly by making states pay a much larger share of welfare costs. The incentive seemed to work; the welfare rolls shrank. But not everyone who left welfare went to work.

A person on welfare costs a state money. That same resident on disability doesn’t cost the state a cent, because the federal government covers the entire bill for people on disability. So states can save money by shifting people from welfare to disability. And the Public Consulting Group is glad to help.

PCG is a private company that states pay to comb their welfare rolls and move as many people as possible onto disability. “What we’re offering is to work to identify those folks who have the highest likelihood of meeting disability criteria,” Pat Coakley, who runs PCG’s Social Security Advocacy Management team, told me.

And PGC’s work is of great value to state governments, as it shifts costs off of their budgets and onto that of the federal government:

The company gets paid by the state every time it moves someone off of welfare and onto disability. In recent contract negotiations with Missouri, PCG asked for $2,300 per person. For Missouri, that’s a deal — every time someone goes on disability, it means Missouri no longer has to send them cash payments every month. For the nation as a whole, it means one more person added to the disability rolls.

Consider the House-passed Ryan budget, which transitions Medicaid into a block grant program and consolidates various low-income transfers into block grants as well, with the goal of drawing on the success of welfare reform. Assuming the labor market for less-skilled workers doesn’t dramatically improve and the disability insurance program remains unchanged, it is easy to imagine the disability rolls growing at an even faster clip as states seek to offload costs to the federal government.

The chief virtue of the Autor and Duggan reform proposal is that it recognizes the central importance of misaligned incentives. They propose creating a “front-end” for SSDI by extending private disability insurance (PDI) to virtually all U.S. workers, yet these new PDI policies would be designed to support work rather than to serve as an offramp from gainful employment:

The proposed policy would support workers from 90 days to 2.25 years following onset of disability, providing partial income replacement and supports geared toward helping individuals maximize work readiness and self-sufficiency. After receiving PDI benefits for twenty-four months, individuals who are unable to engage in substantial gainful employment would transition into the SSDI system. The screening criteria for SSDI would be unchanged. 

Employers would be shielded from catastrophic costs, as the severely disabled would eventually “graduate” to SSDI. The goal, however, would be to reduce the inflow into the SSDI program, and employers will have a strong incentive to keep the number of disability claims low as this will reduce the cost of their PDI policy.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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