The Corner

Economy & Business

It’s Time to Reform Our Bankrupt Disability Insurance

Decades of promises, subventions, entitlements, and safety nets issued by the federal government that simply cannot be paid for are starting to take a toll on our finances. Their consequences are going to be harder to hide from now on. First on the list of government programs going bankrupt is Social Security Disability Insurance (SSDI). The disability trust fund will be exhausted in late 2016. As the chart below shows, the program has been running a permanent cash-flow deficit for a few years. But when the trust fund runs dry, the SSDI will revert to a pay-as-you go system and benefits will be cut by 19 percent.

This is mostly the result of a large increase in benefits and recipients. According to the Social Security Administration, 2.6 million Americans were collecting SSDI in 1970. In 2014, that number reached 10.9 million. Today the program pays about $142 billion. Adjusted for inflation, that’s double what the program cost in 1998.

Last week, I explained how we got there:

When SSDI was implemented in the late 1950s, it was intended to provide benefits to those who were too disabled to work but weren’t yet eligible for Social Security benefits. However, eligibility standard changes implemented in 1984 shifted screening rules from a list of specific impairments to a process that put more weight on an applicant’s reported pain or discomfort, even in the absence of a clear medical diagnosis.

Also, as my colleagues Mark Warshawsky and Ross Marchand explain in an upcoming paper, the problem is made worst by the poor incentives faced by administrative law judges on the appeal side of the system:

Adding to the problem is that if people are initially denied benefits, they can appeal to an administrative law judge, or ALJ. In theory, these judges impartially balance the claims of applicants against the interests of us taxpayers. Unfortunately, many judges don’t. In May, my colleague Mark Warshawsky and George Mason University economics student Ross Marchand noted, “In 2008 judges on average approved about 70 percent of claims before them, according to the Social Security Administration.”

They added, “Nine percent of judges approved more than 90 percent of benefit requests that landed on their desks.” As their data show, those judges who are generous with benefits are also consistently generous over time. This shouldn’t be the case, of course, because judges are randomly assigned cases. This is problematic for taxpayers. In their upcoming Mercatus Center study, Warshawsky and Marchand estimate that over the past decade, decisions from these overly generous judges will cost taxpayers $72 billion.

As the authors note, ALJs have greater incentives to award benefits than to deny them, because approving people involves less paperwork than denying them. Considering the payoffs for applicants (the average SSDI benefit amount is $1,165 per month but can reach $2,663), as well as the lack of incentives to stop appealing when denied and the incentives for lawyers to push their clients through the appeal process, judges — especially the generous ones — are faced with huge caseloads.

In theory, the threat of a 19 percent cut should give the proper incentives to lawmakers to reform the system. But that’s only if we make sure that they aren’t allowed to start raiding the retirement side of Social Security to pay for disability benefits. That would only amount to kicking the can down the road and wouldn’t address any of the fundamental problems with the program. The House has voted against that possibility but I suspect many will be tempted to go down that road at some point.

Another option is to reform the appeal system and change eligibility rules. Warshawsky and Marchand have a few suggestions in their paper. In that case they may want to look at what other countries have done, as AEI’s Andrew Biggs suggested Tuesday morning in the Wall Street Journal:

Holland in the 1980s was referred to as the “sick country of Europe,” with a disability rate — the number of disability beneficiaries per 1,000 workers — triple the U.S. level. Starting in the late 1990s, Holland made two important changes. Before applicants could get benefits, they had to undergo a rehabilitation program to address their disabilities and identify work opportunities. And the government created incentives for employers to accommodate workers with disabilities so they might continue working.

The disability rate in the Netherlands today is slightly lower than in the U.S. and continues to fall — while the U.S. disability rate rises. Sweden and Great Britain passed reforms based on the Dutch example and disability rates have fallen in both countries.

According to Biggs, there is some bipartisan support for these types of reforms, and the stakes are high to get it right.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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