Disability Insurance Needs Reform
The 2017 report of the Social Security trustees, released in July, shows the Disability Insurance (DI) trust fund will be depleted of its reserves in 2028, five years later than projected in the 2016 report. New applications for disability benefits are coming in below the rates that were projected the previous year.
Some policymakers might conclude that these new projections relieve them of the responsibility to pursue serious reforms of the DI program. They would be mistaken. Even with the recent slowdown in disability claims, the DI trust fund is in severe financial distress and probably would already be insolvent were it not for stopgap legislation, passed by Congress in 2015, that temporarily shifted tax revenue from the retirement side of Social Security to pay for disability benefits. But shifting payroll tax receipts in this way is not a permanent solution to the problem because the retirement program is also racing toward insolvency and cannot afford the lost revenue.
Fundamentally, the disability program is projected to run out of funds because it has evolved away from its original design. The number of disabled beneficiaries has increased from around 1.5 million in 1970 to 8.8 million in 2016, driven by changing legal and societal standards.
Following the political backlash to the Disability Amendments Act of 1980 — which tightened oversight of DI benefits — the Social Security Disability Benefits Reform Act of 1984 placed greater weight on disability assessments by the applicants’ personal physicians and reduced the role of state-contracted medical examiners in making final determinations. The criteria for assessing the severity of pain and discomfort as well as mental illness were also loosened. What’s more, the increasingly subjective nature of disability decisions has made the program sensitive to economic conditions. During periods of slow economic growth, applications for disability benefits surge.
The consequences of these shifts can be seen in the pattern of benefit awards. The percentage of beneficiaries awarded benefits based on mental health and musculoskeletal impairments (such as back pain) has risen dramatically from 27 percent in 1982 to 53 percent today. The deep recession of 2007 to 2009 led to an additional 2.5 million applications for disability benefits relative to what would have occurred if the economy had kept expanding during those years.
In 1970, the disability program cost 0.8 percent of taxable payroll (taxable payroll is a measure of aggregate wages earned by all U.S. workers below the maximum wage subject to the Social Security payroll tax). This level of program spending could be financed with a payroll tax of just 1.1 percent. By 2008, disability program spending had doubled to over 2 percent of taxable payroll. The 2017 trustees’ report projects that total spending will rise to about 2.2 percent of taxable payroll over the long run. Trust fund income will stay steady at 1.84 percent of taxable payroll, which means the program will run a steady and unrelenting deficit under current law. In dollar terms, the disability trust fund has unfunded liabilities of approximately $1.0 trillion.
Key to disability reform are programmatic changes that would keep people in the workforce before they become permanently dependent on disability support. The following are a series of adjustments to the program that should be implemented to see if they improve program results. Some of these suggestions track with recommendations included in the Trump administration’s 2018 budget proposal.
1. Mandatory Physical Therapy or Treatment with Job Support for Certain Applicants. Many people with back pain and depression respond to effective treatment. The Social Security Administration (SSA) should conduct a test of an aggressive program to help applicants with these conditions stay in the workforce by requiring them to participate in a treatment and job support effort before their applications are considered.
2. Temporary and Partial Disability Benefits. Current disability benefits are an all-or-nothing proposition. Applicants wait years for approval. Then, once on the program, they are reluctant to consider anything that might jeopardize their benefit status. A different approach would recognize that many workers could return to work if given temporary support and health care, allowing them time to rehabilitate and then find new employment.
SSA should assess whether a short-term benefit of perhaps two years would allow some workers who might qualify for full benefits to return to employment more readily. These applicants would get an immediate time-limited and partial benefit, along with health coverage, while being treated for their conditions and assisted in job searches. The income support provided during this period would be less than provided with full DI benefits, but would not be reduced as quickly as full DI benefits when the beneficiaries earn wages. The temporary benefits would be terminated at a time certain, and the beneficiaries would not be presumptively eligible for full benefits if they had not found work.
3. Experience-Rated Employer Taxes. Today, all employers pay the same disability insurance payroll tax on their workers’ earned income (1.185 percent for 2016 through 2018). Employers who employ workers who later become eligible for disability benefits at high rates could be required to pay a higher tax. Conversely, employers who have few workers who end up on the disability program might enjoy a reduction in their tax rate.
Adjusting the tax rate in this way would give employers a strong incentive to examine more closely what they could do to prevent their workers from becoming disabled. It may also encourage them to provide additional services to workers who may be at risk of going on the disability program to allow them to stay employed.
4. Other Reforms. Congress should tighten up other aspects of the disability program. For instance, as proposed in the Trump budget, applicants should not be allowed to receive both disability and unemployment benefits. And applicants who recently received unemployment compensation just prior to applying for disability benefits should receive enhanced scrutiny based on their recent work record. Only applicants who can show that their conditions have worsened in some measureable way during that period should be considered for benefits. In addition, SSA should devote all necessary resources to program integrity and vigorous review of existing beneficiaries to ascertain their ability to return to work.
The DI program is an important component of the nation’s safety net. It provides essential income support to many millions of workers who, for various reasons, can no longer earn sufficient incomes to support themselves due to their disabilities. But disability benefits should not become an avenue for unnecessary and counterproductive exits from the workforce.
After many years of steadily increasing disability prevalence rates, it is time to recalibrate the program. It is better for people’s financial well-being and overall health to remain in the workforce as long as possible, rather than to get disability support. An early exit from the labor force based on a disability is all too often a premature end to the productive work of an individual who could stay employed for many more years under the right circumstances.
Tejesh Pradhan is a Ph.D. candidate in economics at American University. James C. Capretta is a RealClearPolicy Contributor and holds the Milton Friedman chair at the American Enterprise Institute. They co-authored “Despite a Temporary Reprieve, the Disability Insurance Program Needs Structural Reform,” published by AEI.
