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.