The Ripon Forum

Volume 45, No. 2

Spring 2011 Issue

Reforming Social Security Disability Insurance

By on October 20, 2014

by RICHARD V. BURKHAUSER

United States disability program expenditures are rising at an unsustainable pace. The just released 2011 Annual Report of the Social Security Trustees documents that since 2009 Social Security Disability Insurance (SSDI) has been paying out more in annual benefits than it has been receiving in taxes and interest from its trust fund. At this pace, it predicts that SSDI will be insolvent by 2018.

These costs are not driven by a medically based disability epidemic — the percentage of working-age people with work limitations has not changed over the past 30 years. Instead, as Mary Daly and I argue in our forthcoming book, The Declining Work and Welfare of People with Disabilities: What Went Wrong and a Strategy for Change, it is primarily a consequence of changes in SSDI and Supplemental Security Income (SSI) program rules and their administration. These changes have made it far easier to gain entry to these benefit rolls for those with disabilities who do not work.

Since 1982, this policy-driven epidemic has reduced the employment of working-age people with disabilities from roughly 35 to 23 percent and increased their enrollment in SSDI and SSI from 33 to over 50 percent. That is, working-age people with disabilities are now more likely to stop working and take the non-work path to SSDI or SSI. But, the increase in benefits from these programs has, on average, barely offset the reduction in their earnings, making them as a group no better off economically and more dependent on transfers. Hence, despite the substantial increase in SSDI program costs, the economic well-being of working-age people with disabilities has fallen further behind the rest of the working-age population, whose average income has increased over the last 30 years.

…working-age people with disabilities are now more likely to stop working and take the non-work path to SSDI or SSI.

Fortunately, since past policy changes are the cause, future policy changes can be the solution. But policy change is never easy. Previous attempts at SSDI policy reform have only temporarily succeeded in controlling program growth. Reforms started by the Carter administration and vigorously pursued by the Reagan administration in the early 1980s — during a severe economic recession — focused on removing current beneficiaries from the rolls. These reforms were extremely controversial and resulted in a backlash that ended up making both SSDI eligibility criteria less strict and removing someone already on the rolls nearly impossible. Rather than simply returning to policy changes taken up in the 1980s, we argue that reforms should be pro-work and hence focus on slowing SSDI growth at the entry point. The question is how to do it.

The answer begins with the recognition that SSDI is the final part of a much larger set of public and private programs available to individuals following the onset of a work-limiting impairment. At each point in the process, those with a disability and their service providers both have to make decisions with respect to accommodation, rehabilitation, and return-to-work which will determine whether a move along the path to long-term SSDI benefits is warranted. SSDI is not a passive actor in this process. Rather, the way SSDI is financed — and its willingness to accept responsibility as the last-resort program for those with serious impairments who do not work — influences the way workers and employers respond to a worker’s initial health shock.

Our current system of funding SSDI via a flat-rate payroll tax on employers and employees fails to send the appropriate signals with respect to the full costs of a worker moving from the work path to the permanent disability path. In contrast, raising the SSDI payroll tax of firms whose workers enroll in the system at above-average rates and lowering the SSDI payroll taxes on firms whose workers enroll at below-average rates via experience rating would more directly link the costs to the firm of one of its workers moving onto the SSDI program. Doing so would require an employer to balance the full economic costs and benefits of providing accommodation and rehabilitation versus assisting a worker onto the SSDI program following a health shock.

Our current system of funding SSDI via a flat-rate payroll tax on employers and employees fails to send the appropriate signals with respect to the full costs of a worker moving from the work path to the permanent disability path.

Under the current cost structure, the federal government pays for the additional SSDI beneficiary, which simultaneously frees the employer from bearing the costs associated with accommodation and rehabilitation. Employers who bore the costs for both options would be more incentivized to make the investments in accommodation and rehabilitation that could prolong the employment tenure of a worker with a disability. This is currently the system used to fund state Workers Compensation benefits, and the best practices from these state programs could be considered for SSDI as well.

Alternatively, employers who provide short-term private disability insurance for employees and whose private insurance agents cooperate with SSDI gatekeepers in managing their cases could be granted a reduction in SSDI tax rates, while firms that did not offer such private insurance could be charged higher SSDI tax rates. Each of these alternative reform mechanisms would make employers more likely to provide greater accommodation and rehabilitation to their workers immediately following the onset of a disability. Doing so would not only bend the cost curve of projected SSDI program expenditures by reducing incentives for employers and employees to overuse the system, but would increase the employment of working-age people with disabilities as well as their income.

Can Experience Rating Work? In a forthcoming piece for the Industrial and Labor Relations Review, I – along with fellow authors Maximilian D. Schmeiser, and Robert R. Weathers II — show that employers were more likely to provide accommodations to their workers following the onset of work limitation when it occurred on the job and, hence, were more likely to be subject to experience rating. Other evidence suggests experience rating of Workers Compensation has improved safety and reduced accidents by requiring employers to more directly bear their costs. This direct relationship between the benefits received by a firm’s workers and the premiums the firm pays encourages firms to provide the optimal amount of accommodation and rehabilitation and thus reduces transfer payments and ensures greater return to work by injured workers.

This direct relationship between the benefits received by a firm’s workers and the premiums the firm pays encourages firms to provide the optimal amount of accommodation and rehabilitation, and thus reduces transfer payments and ensures greater return to work by injured workers.

The current method for funding SSDI that allows employees, employers, and private insurance agents to pass the costs of long-term cash transfers to the federal government is unsustainable. The most straightforward way to overcome this flaw is to ensure that those best able to provide the mix of accommodation, rehabilitation, and access to short- and long-term disability cash transfers to workers following the onset of a disability have the correct cost signals to make these decisions efficiently.

For SSDI, this can be achieved by giving workers, employers, and private insurers these same signals via experience-rated employer payroll taxes

Richard V. Burkhauser is the Sarah Gibson Blanding Professor of Policy Analysis, in the Department of Policy Analysis and Management, Cornell University and an American Enterprise Institute Fellow. He is also co-author, with Mary Daly, of the forthcoming book, “The Declining Work and Welfare of People with Disabilities: What Went Wrong and a Strategy for Change” (American Enterprise Institute Press).

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