Making Disability Insurance Work Better

Aug 30, 2013 | Social Security

Naturally, lawmakers are diverting their attention to resolving sequestration, the debt ceiling, and the expiring continuing resolution, but another important budget matter is only a couple of years away. The Social Security Disability Insurance Program will exhaust its trust fund by 2016, at which point benefits will either need to be cut by 20 percent or transfers will need to be made from the old-age fund, shortening its lifespan by two years (2035 to 2033).

Reforming the DI program is particularly needed after what was revealed during the Great Recession. Today in Roll Call, Richard Burkhauser writes that the DI program might be providing benefits to people who could work but may be reluctant due to the job market.

SSDI reached an enrollment peak of 8.85 million in March 2013. This represents a 21 percent increase since the start of the recession in 2007 and worsens a long-term SSDI growth trend: Since the mid-1980s, the percentage of working-age adults enrolled in SSDI has doubled. Demographic changes account for 56.2 percent of this increase: more women entering the workforce, the growing total population, the aging of the baby boomers, all result in more individuals needing the program’s support.

The remaining 43.8 percent consists of individuals who, with different interventions and incentives, might have continued productive employment but are instead discouraged from working by the law of the land.

SSDI is in need of reform not only to improve its finances, but to also better serve those who are not able to work. The program's misaligned incentives prevent it from delivering the quality of service it is capable of providing. Writes Burkhauser:

Instead of receiving accommodation and rehabilitation when it is most effective, immediately after becoming disabled and unable to work, these workers face a slow SSDI approval process that, with appeals, can take years to resolve. By then, the workers are so removed from work that re-entering the workforce becomes an even more daunting task. While SSDI does provide a measure of economic security through income support and health coverage, it can’t generate the social and mental-health benefits strongly associated with employment. Those with impairments who continue to work tend to fare better from both a quality of life and financial perspective than those who must rely on SSDI.

SSDI’s structural flaws don’t help employers solve the problem either. SSDI is currently financed through a flat 3.2 percent payroll tax for companies and their employees. The tax rate is fixed and is not based on how many companies’ employees go onto the SSDI rolls: Regardless of whether 1 percent or 15 percent of company X’s workers enroll in SSDI, company X pays the same tax. As a result, firms are not encouraged to provide the workplace accommodation and rehabilitation to get their employees back to work. It is cheaper for them to help their workers onto SSDI and hire someone to replace them.

Burkhauser is not the only one to suggest reform. The Hamilton Project, the CBO, and former CEA chair Michael Boskin, and CRFB senior policy director Marc Goldwein, and many others have proposed specific policy changes for the SSDI program. Our Social Security simulator "The Reformer" also allows users to address DI while attempting to make the whole OASDI trust fund sustainably solvent. Whatever changes lawmakers find appropriate, it is clear that it is time to start taking a serious look at this program.

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