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Disability Insurance: a non-hot topic with very hot implications

The Social Security Disability Insurance (SSDI) is one of the two components of the American Social Security Program (the other is the Retirement trust fund). It insures workers against loss of income and grants access to the government’s Medicare program in the event of a work-limiting disability that ends their careers prior to their reaching full retirement age[1]. However, its expenditures on cash transfers and medical benefits are growing unsustainably thus posing a threat to the sustainability of the American Social Security fund itself.

As much as a disability trust fund might pose as an altruistic idea, there are some policy issues. By setting an income threshold above which one no longer qualifies as disabled, the program creates a strong incentive against participating in the formal labor market. Also, the elasticity of the definition of disability allows for a rise in disability claims when the unemployment rate rises[2]. How? The substance of the definition states you are disabled if are unable to engage in substantial gainful activity in the U.S. economy for a reason of health or disability. So when there are fewer jobs available, one may be unable to work because the type of health limitation they have means the type of job they would be able to do is not available at present – and that qualifies as a disability.

So, the combination of a program that is becoming more valuable due to the rising value of medical care, and more accessible due to the liberalizations made by Congress, with a labor market that is becoming less forgiving make the disability program look like a good option for many people. One idea that has been put forward[3] is the use of private sector insurance as a way to spread to more workers the provision of incentives to remain in the labor force. Preliminary evidence[4] suggests that the return-to-work rates are potentially higher among the 1/3 of Americans already receiving private disability insurance as those programs aim at keeping workers in the labor market (through vocational training, fairly generous partial wage replacements, etc.).

Although SSDI is paid for by only 1.6% of the total payroll tax, since its liberalization in 1984, the program has doubled its consumption of social security dollars from 10% to 20%[5]. Furthermore, an increasing number of disability beneficiaries enter the program for mental illness reasons, which typically have an early onset and a low mortality and imply that the people will be on the program for many years. It is therefore projected that this fund will go bankrupt in 2 to 4 years. What are the implications? With the SSDI continuously draining more money out of the Social Security total trust fund, the bankruptcy horizon for the latter, which currently points for 2 decades from now, might actually happen sooner.

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[1] Benefits for People with Disability (http://www.ssa.gov/disability/)

[2] Daniel, Sanders and Black, The Impact of Economic Conditions on Participation in Disability Programs: Evidence from the Coal Boom and Bust, 2002

[3], [4] and [5] Autor, The Unsustainable Rise Of The Disability Roles in the United States: Causes, Consequences and Policy Options, 2011

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Author: studentnovasbe

Master student in Nova Sbe

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