Ten Things You Should Know About the Disability Disaster

 

Takeaway

  • Almost 5% of working age people are receiving disability payments
  • Once someone goes on disability, there is little chance that they will ever return to work
  • The disability trust fund is taking in 20%-30% less than the amount being spent and is expected to be exhausted in the next few years

McCombs Senior Lecturer Sandy Leeds provides analysis of key market issues on his blog, Leeds on Finance, where this article originally appeared.

I frequently talk about Social Security, and we always think about the Social Security retirement payments. But Social Security is actually OASDI – “Old Age, Survivors and Disability Insurance.” Today, it’s time to talk about disability. Here are some quick background facts about disability insurance:

  1. You are eligible for disability insurance if you have paid payroll tax for five of the ten most recent years. The payroll tax is 1.8% (the employee pays .9% and the employer pays .9%).
  2. You are entitled to disability if you have a medical condition that has lasted or is expected to last at least one year or will result in death. You must be unable to engage in previous work or adjust to a different type of work.
  3. The benefits are equivalent to the Social Security payments that you would receive if you retired at full retirement age, which used to be 65 but is in the process of gradually being changed to 67.
  4. After you’ve been disabled for two years, you are entitled to Medicare. This is a very attractive feature for recipients.

Ten Things You Should Know About Disability

There are so many outrageous things to tell you about the disability program. Here are ten.

  1. Almost 5% of working age people (25–64) are receiving disability payments. Do you believe one-in-twenty people are disabled?
  2. Disability has become a safety net. Two percent of working age people applied for disability in 2010. Do you believe that 2% of all working people became disabled in 2010 or do you believe a weak job market had something to do with this?
  3. Disability has become the program of choice after 99 weeks of unemployment insurance lapse. Look at the chart below (from Krueger and Mueller, cited at bottom of today’s blog). You can see that people who do not have access to $5,000 claim disability at a much higher rate when their unemployment insurance lapses. Think about this — there’s no reason that this group should have a higher disability rate than people who have access to $5,000.
  4. Once someone goes on disability, there is little chance that they will ever return to work. There are three ways to leave disability: you can die, you can reach full retirement age and shift to the Social Security payroll or you can return to work. Less than 1% leave the disability roll by returning to work. See chart below.
  5. If your initial claim for disability insurance is denied, your appeal is heard by an Administrative Law Judge. The ALJ will reverse 75% of the initial decisions. Think about this: the appellant is represented by an attorney. The government, on the other hand, does not have an advocate at the hearing. As a former prosecutor, I’ll let you in on a little secret: It’s easier to win a trial or a hearing when there’s no one arguing against you.
  6. The disability “trust fund” is expected to be exhausted in the next few years. They are currently taking in 20%-30% less than they are spending. Go figure.
  7. Some rocket scientists want to start to allocate more of our payroll taxes to disability (and away from Social Security) in order to save the disability fund. Talk about robbing Peter to pay Paul. Of course, this was our solution in the 1990s. We’re a nation of morons. Or better said, we’re a nation that has elected a bunch of morons.
  8. In 2010, there were approximately $124 billion of cash payments under the disability system and the Medicare payments (to people receiving disability) cost approximately $70 billion. The total spending is approximately $1,500 for every U.S. household. It’s 7.3% of federal non-defense spending.
  9. Spending has grown at a real rate (i.e., greater than inflation) of 5.6% for the past 20 years. All other Social Security spending increased at a 2.2% real rate. In 1988, disability spending was one in ten dollars spent by the Social Security system. Now, it’s almost one in five dollars.
  10. The average new awardee is 48.8 years old. The present value of the cash and medical benefits that they will receive (until Social Security takes over) is $270,000.

Some Final Thoughts

I don’t dispute that plenty of people are disabled and need these benefits. In fact, I want these people to receive payments. I want the money to be there so that we can pay these people. But there is far too much fraud going on. I’m sorry, but 5% of the population is not disabled. Work is becoming less physical. Medical care is better. There’s little reason to believe that real disabilities increase in a recession or that unemployment insurance exhaustees without money should have a higher incidence of disability than those with money. Finally, you can’t convince me that only 1% of disabled people recover in a year.

Two last random things to consider:

  1. This is one factor (among many) that accounts for a drop in the labor participation rate (so the unemployment rate is misleadingly low).
  2. While counterintuitive, you could also argue that this is a justification for extending unemployment benefits (like we did). We need to give people time to find work. Otherwise, some of them claim disability. Once we lose them to disability, they’re gone. You have to accept the fact that some people are gaming the system. If we let them get on disability, the game is over and we just lost $270K in present value terms.

 

 

SOURCES:

David H. Autor, “The Unsustainable Rise of the Disability Rolls in the United States: Causes, Consequences and Policy Options,” National Bureau of Economic Research (December 2011).

Krueger, Alan, and Andreas Mueller. In progress. “Applications for Disability Insurance and the Exhaustion of Unemployment Insurance Benefits: New Evidence from a Survey of Unemployed Workers.” (Cited in “Unemployment Insurance Extensions and Reforms in the American Jobs Act” by the Executive Office of the President)

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.

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