Economics, Entitlements, Pethokoukis

The problem with Social Security Disability Insurance is worse than you think

Credit: WSJ

Credit: WSJ

Looks like we have at least a partial explanation for the continued decline in US labor force participation. And it’s not just all those baby boomer retirements. The Wall Street Journal:

Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.

The unemployment rate in Friday’s report fell to a four-year low of 7.6%, which most times signals job growth. This time it reflected workers leaving the workforce, a problem that could persist: Economists say relatively few people are likely to trade their disability checks for paychecks, in part because the program doesn’t give much incentive to leave.

What you have here is a permanent move for many from the workforce to the dole, what economists call “hysteresis.” Not only are average annual payments some $2,000 more than full-time work at minimum wage, but after two years ”people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.”

So at least part of SSDI now functions as long-term unemployment compensation. The costs? SSDI payments ($137 billion) + related Medicare payments ($80 billion) + loss of economic output ($95 billion, according to Feroli) = $312 billion a year in annual costs.

Check out this piece from the WaPo’s Dylan Matthews on various reform proposals, but the leading one would have business pay the premiums for a couple of years of disability insurance before SSDI kicks in. The idea is that this would create incentives for business to try and keep workers working. Matthews:

The benefits would run out after 27 months, and after 18 months of collecting benefits, employees could apply for Social Security Disability Insurance payments. That’s a much longer wait time than the current five-month SSDI waiting period. The idea is that this would give employers an incentive to accommodate disabled employees and give those employees a strong incentive to stay in the workforce by not reducing benefits if they keep working (as happens under SSDI). But the plan is also intended to leave SSDI in place for beneficiaries who really cannot work.

12 thoughts on “The problem with Social Security Disability Insurance is worse than you think

  1. Could this dramatic increase in SSI recipients possibly have anything to do with the constant stream of lawyer advertising to get their clients the SSI they deserve? Hmmmm?

    • No, but nice try. According to SSA, the rise in disability rolls was anticipated due to aging of the populace (one is more likely to get disability if one is 50 or older). SSA WANTS lawyers involved, because the lawyers take over preparing the cases for hearing, meaning SSA does not have to hire the people to do so

      • So Lawyers are ill advised to have ad campaigns? SSA “judges” are SSA employees. There is no one at the hearings that “represent” the government(read:taxpayers)
        But nice try.

        • A judge in the room, but his staff does not have to prepare the case for hearing by contacting employers and medical sources.

          As for the rest of your comment: lawyers advertise all the time to distinguish themselves for others and create brand recognition, just like any other business.

          Your second sentence and third sentence don’t make sense. I answered the second question above. As for the third sentence, you answered it already, i.e., in every hearing an SSA lawyer is in the room and that lawyer is also called a judge. Since they approve less than 50% of their applicants, the mind boggles at the expense of putting ANOTHER government lawyer in the room

  2. This just in, Jimmy cares about poor people.

    I mean, not enough to help them with their medical problems (see massive Jim opposition to Obamacare and Medicare) or their economic problems (see Jim’s opposition to higher taxes and hatred of government programs), but enough to want to cut the poor with medical conditions off of the massive 1000/month they receive.

    Mr. Pethokoukis’s smug condescension toward to the ill and unemployed would have been so appropriate in Dickensian times. Keep helping Art and AEI create this New Gilded Age, Jim, and maybe you can go to the orphanage and kick Oliver Twist Redux yourself.

    • I think Mr. P’s interest is in the quality of life for future generations, something that liberals have little interest in.

      • Bill rap. If he cared about “future” generations, he would be in favor of eliminating tax breaks for off-shore operations and taxing capital gains like income, which would help balance his precious deficit. Jim cares about rich people becoming more rich and him being one of their rent-boys, so he can cash a nice check.

  3. In the 2008-2012 period (deep, long recession and sluggish recovery), the SSDI worker beneficiary count rose 1.7 million (24%) and the participation rate dropped 2.7% to 63.3%. In the prior 5 year period (average recovery), the SSDI worker beneficiary count rose 1.6 million (29%) and the participation rate dropped 0.3% to 66%. It’s demographics. Feroli has a conundrum. He needs to explain the 2 discrete periods.

    Back in 1995 when there were 4.2 million disabled workers on SSDI, the Social Security Administration predicted (intermediate assumption) that the SSDI worker count would be 7.9 million in 2010. The actual count was 8.2 million. Pretty good call on the demographics considering that the 2007-09 recession was the longest and deepest since SSDI was implemented and that there is some correlation between the unemployment rate and SSDI applications/awards.

      • What’s the relevance of the occupation of a disabled worker?

        The point is simple. How do you square the material change in the participation rate with the non-material change in the SSDI rolls during the 2 periods? The SSA prediction is just a bonus fact for Feroli.

        Oh, and Jimmy P. conveniently forgot about the DI payroll tax revenues of $109 billion. Tsk…tsk. So I suppose that $80 billion outlay in Medicare would be an $80 billion outlay in Medicaid if the worker was not disabled, eh?

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