Saving SSDI

As the disability-insurance program’s trust fund runs out of cash, there are new signs of internal reform—but more changes are needed.

Fred Prouser / Reuters

The Supreme Court recently saved the Affordable Care Act with its emphatic 6-3 ruling in King v. Burwell. One time bomb in American health policy was thus defused, but another has kept right on ticking.  So far, it hasn’t received much public attention. That will change, since the bomb is primed to explode almost exactly on Election Day, 2016.

Next fall, the trust fund that finances the mammoth $140 billion Social Security Disability Insurance (SSDI) program will run out of money. After that, SSDI tax revenues will only be sufficient to pay about three quarters of the benefits to which SSDI recipients are legally entitled.

The two parties disagree deeply about how to fix this problem. It’s possible that this fight will go down to the wire—maybe past the wire, as the debt ceiling fight almost did, and as various government shutdowns have actually done.

It’s possible that Congress will impose sweeping, punishing, and unwise changes to reduce SSDI spending. Ironically, the fight over these proposals unfolds just as information is coming to light regarding quiet but important operational changes within SSDI itself that may have already reduced the program’s long-term financial imbalance. SSDI has become a more stringent program during the Obama years, admitting fewer than expected new recipients onto program rolls. These changes have been largely masked by the momentum of an aging population, and by a national economic crisis that brought more people to the disability rolls. Yet it’s now becoming clear that these changes are real, though their long-term social and economic implications remain to be explored.

The SSDI Shortfall and the Rhetoric of Crisis

SSDI is a big program. Yet it never quite gets the same attention as Medicare, Medicaid, and other social programs. Disability policy is intricate and specialized. It has traditionally been less ideologically polarized, which makes it less interesting to both liberal and conservative political media.

SSDI faces budget problems because the percentage of working-age SSDI recipients has steadily increased over the past thirty years.

Average Monthly SSDI Beneficiaries

Social Security Administration

Disability experts are coming to some agreement regarding the demographic and economic drivers of these trends. The greatest growth occurred during the 1980s and early 1990s, and in hard economic times. Among men, age-specific applications to SSDI basically stabilized by the mid-1990s, though applications continued to rise and fall with the changes to the national economy. As the bottom falls out of the blue-collar economy, disability programs face increasing pressure to serve workers who have genuine impairments, but who might well have remained in the workforce in more prosperous times. Recipients are also living longer, rarely returning to the paid workforce.

Growth in the SSDI rolls has proved most dramatic among women. They are now more likely to participate in the labor market, and thus gain eligibility for SSDI, than they were just a few decades ago. Women workers now take up SSDI at about the same rates as male workers at the same ages.

Research by Harvard’s Jeff Liebman, first published in the Journal of Economic Perspectives, shows the basic pattern. The two graphs on the left show the sharply increasing rate of actual SSDI applications for men and women over time. The two graphs on the right show the same data, assuming that the age mix of the U.S. population had stayed constant at its 1980 level and that the unemployment rate was held constant at 6.3 percent, the average for this entire period.

The rate of applications increased from the early 1980s to the mid-1990s, and then actually leveled off, remaining surprisingly steady for the past two decades. Yet caseloads continued to increase, driven by an aging population, continuing national economic challenges, and declining death rates among recipients.

The current SSDI system serves about 8.9 million disabled workers (and another two million spouses and children) who live with conditions including stage-IV cancers, spinal-cord injuries, schizophrenia, and and mood disorders.

Much of SSDI’s recent growth has occurred among recipients suffering from musculo-skeletal conditions and mental disorders. Data taken from the Annual Statistical Report on the Social Security Disability Insurance Program from 1996 to 2013 confirm the trend, although not its causes.

The labor market consequences of these conditions are hotly contested, and likely vary with the state of the economy.  Most other categories—including ones you might have suspected would have grown such as diabetes or intellectual and developmental disabilities—have remained far more stable over time.

SSDI Recipients by Qualifying Diagnosis

Social Security Administration

These patterns help explain why the moral dimension of disability is never far from the surface. A person with back problems or major depression faces skeptical questions that her counterpart with paraplegia does not. SSDI provides health coverage and vocational services that many people obviously need. It also brings a modest cash payment, which is less obviously required for many people. So the inherent tension between incentives and risk-spreading becomes especially freighted. We want to protect people from the consequences of serious illness and injury. Yet we’re uncomfortable when this protection reduces peoples’ incentives to seek paid work.

Much public discussion focuses on fraud. Fraud certainly exists, and provides fodder for sensationalist media accounts, but it appears to be a secondary problem. The screening process is challenging even for applicants with obvious and uncontested disabilities. Most SSDI claims are initially denied. Even after all appeals have been exhausted, only about half of all applicants manage to get approved.

If fraud were rampant, then applicants who were turned away might be expected to find other ways to make a living. But those who are rejected from the SSDI program generally have low rates of employment and earnings. One study that looked at men who applied for benefits in 1997 found that, two years later, not many were earning substantial sums in the labor market. The rejected applicants between the ages of 45 and 64 earned an average of $7,640. Even their younger peers, between the ages of 30 and 44, averaged just $8,440. And the application process itself suppresses people’s later employment and earnings.

Once people enroll in SSDI, they rarely exit before death or retirement. Exit rates from the program among living beneficiaries are on the order of 1 percent per year. Such inertia reflects the life experience of SSDI recipients.  You might conclude from this pattern that SSDI provides terrible incentives to go back to work. That’s not true. SSDI’s work incentives are better than one might think.  For starters, you can earn about $1,100 per month without losing any of your benefits.

The real obstacles are sadder and more mundane. The often-protracted process of applying for and receiving disability benefits further separates already-burdened people from the paid workforce. Applicants spend years building a paper trail, dealing with punishing administrative delays, accumulating a credible biography that establishes their inability to obtain employment. By the time they’re accepted or rejected, they’ve made all too good of a case. And once they are on the program, SSDI recipients are understandably reticent to put their benefits at-risk or to create further bureaucratic hassles.

Given all these factors there is no simple solution to SSDI’s fiscal challenges. It’s easy to describe next year’s predicted depletion of the SSDI trust fund as a fiscal crisis. The real crisis is political and administrative, not a fundamental lack of financial resources. Since 1980, SSDI spending has increased by about 0.3 percent of gross domestic product. That’s a very manageable problem when  compared with Medicare (up by about 2.5 percent of GDP since 1980) or the big revenue hole created by Bush-era tax cuts.

SSDI benefits are also modest. The average monthly benefit is about $1,146. Of course, Medicare expenses have increased among SSDI recipients. This medical spending is concentrated among recipients with the most serious medical conditions whom no one in good conscience is likely to remove from the program. Even if one pared the SSDI rolls, almost everyone affected would have sufficiently low-income that their health care would be largely financed by the federal government anyway, through Medicaid or through heavily-subsidized coverage within the new health-insurance marketplaces.

Congress could add many years to the SSDI trust fund by modestly reallocated funds from other Social Security accounts. The Obama administration has proposed to shift 0.9 percent of the current Social Security payroll tax from old-age pension and survivor insurance (OASI) to DI over the years 2016 to 2020. This would avert the immediate crisis, extending the SSDI trust fund out to about 2033.

Although this simple switch has been implemented many times before, it’s a heavy political lift this year because SSDI’s politics have become polarized. Republicans may push for radical program changes on the theory that Democrats will yield to keep the program solvent. Democrats might succumb to this pressure, but they are more likely to resist. President Obama was politically damaged and embittered by the concessions he made during the debt ceiling fight. He’s unlikely to yield again.

The historical record suggests that threats to cut SSDI are likely to prove hollow. Politicians in both parties remember the early 1980s, when the Reagan administration precipitously removed hundreds of thousands of people from the federal disability rolls. The result was a political, administrative, legal, and human disaster. People with severe mental illness, cancers, and paralysis were wrongly purged from program rolls. There were reported suicides.

Media coverage was correspondingly savage. This Knight-Ritter story was pretty typical:

Bennie Roten, 41, of Jefferson, N.C., used up his life`s savings after he was removed from the disability program in March, 1982. It took him a year to win back his benefits after the government told him he was well enough to work-despite a rare joint disease, a ruptured disk and ulcers.

“For a period of three years I was in the hospital 10 times,” said Roten, an ordained Baptist minister and former meat cutter. “As I told them, it’s kind of hard to hold down a job when you can’t get up.”

Many Republican politicians will hesitate to push anything like this again—particularly in a presidential election year.

SSDI Reform: First, Do No Harm

There is no easy political or administrative fix for SSDI’s problems, because there is almost never a simple, cheap, and administratively feasible approach to any aspect of disability policy. Jerry Mashaw’s classic book, Bureaucratic Justice, reminds us that the commonsense term “disability” itself denotes a multi-dimensional and continuous set of functional limitations that will never easily fit any binary administrative category, let alone one that must be adjudicated in more than 500,000 Social Security hearings and dispositions across America every year. SSDI will always require thousands of disability examiners, thousands of pages of regulations, complicated diagnostic distinctions, and detained administrative rules. Clumsy, incrementalist, and arcane bureaucratic systems of the sort Johns Hopkins’ political scientist Steven Teles laments as “kludgeocracy” will always be required.

Critics have proposed several structural changes to SSDI. One intriguing suggestion is to require firms to offer private disability insurance (PDI), and to provide SSDI only after private disability insurance runs its course. Such a policy would shift some of SSDI’s costs onto private employers, and thus onto covered workers. It would also bring both advantages and risks.

PDI is typically more generous than SSDI. It may therefore provide better income support.  PDI is more effectively integrated with workers’ existing employment. Because firms pay PDI premiums based on their prior claims experience, such a policy would increase firms’ incentives to find ways to keep workers on the job. This would be especially helpful for workers who experience serious but temporary disabilities.

PDI may also provide more stringent examination of disability applications, and thus more effectively address dubious claims. There is some accompanying danger that PDI will be too tough, denying needed help. As the Manhattan Institute’s Scott Winship acknowledged in a recent piece, such policies may elicit other unintended consequences, including increased potential incentives to discriminate against employees or job applicants who seem likely to become disabled.

Winship mentions a second proposal: Private long-term unemployment insurance (PLUI). This seems less promising without some mix of public subsidies and an individual mandate to keep low-risk workers in the insurance risk pool. One could also reduce benefits over time, for example by providing lower annual cost-of-living increases. Here the problem is that average SSDI benefits are already modest. People living with disabilities already face daunting and costly challenges.

Responsibly Tighten Eligibility—Which May Be Happening Already

One more puzzle piece is probably needed. We’ve needed to somewhat tighten and standardize SSDI eligibility for some conditions. It pains me to write this, since it feeds into talking points of those who would impose excessively punitive policies or who might disparage SSDI recipients. Yet I believe this is necessary. The marked variation across the country in the level and growth of SSDI receipt suggests the need to ensure more uniform requirements. In five states (West Virginia, Kentucky, Alabama, Arkansas, and Mississippi), more than ten percent of the population age 18-64 now receive some form of federal disability benefits. Especially in a post-ACA world where we have other ways to address people’s serious health-care concerns, such high take-up rates undermine disability programs’ public legitimacy.

Without much public attention or fanfare, there are signs that the Social Security Administration has actually been tightening things up. Recent research by David Cutler and colleagues indicates that SSDI rolls rose significantly less than one might have expected during the Great Recession. Such patterns are consistent with more stringent evaluation of borderline claims among workers with chronic health limitations.

Staff at the Social Security Administration Board and SSA’s Office of Disability and Review have analyzed even more surprising data on the decisions made by administrative law judges who play a critical role in determining who is eligible for SSDI.

MIT economist David Autor highlighted some of these analyses in a recent conference operated by the National Bureau of Economic Research. (Professor Autor graciously shared data for the next three figures below, which were presented there.) As shown, “allowance rates” (the proportion of applicants found eligible for benefits in administrative proceedings) have really declined over the Obama years.

Administrative law judges (ALJs) have quietly but significantly become more stringent in evaluating disability claims.

These trends include two noteworthy patterns, which statisticians would label both period and cohort effects. All ALJs are apparently becoming more stringent over time. At the same time, more recent appointees appear more stringent than earlier cohorts of ALJs who were appointed and professionally socialized within the SSDI program of 10 or 15 years ago. This latter effect is surprisingly large. Judges appointed in 2014 appear to approve ten fewer applications out of every 100 than do their counterparts who were appointed in 2005.

The most striking changes appear to have occurred within the domains of mental health and musculoskeletal disorders—precisely the categories that have seen the most contentious increases. SSDI awards for mood disorders have most sharply declined, and are now just below the levels observed in 1999. Awards for musculoskeletal conditions have stabilized, after rapid increases in earlier years.

Disability Insurance Awards By Diagnosis (Per 1,000 Insured)

Social Security Administration

In short, SSDI has quietly become a more stringent program than it was five or ten years ago.

It’s hard to know whether this tightening of standards represents sensible enforcement of proper standards, or a move that effectively denies benefits to genuinely needy applicants. Given the diversity of SSDI applicants, I suspect both things are happening at once. It would be wise to wait and see the full consequences of these program changes before casting final judgment. It would also be wise to wait and see before suggesting other dramatic changes in a program that serves millions of recipients and their families.

Principles of Sensible Reform

Given that need for caution, any set of reforms should embrace three principles:

Incremental improvements are better than radical measures. SSDI requires steady, evidence-based improvement. No one has the evidence or the administrative skill to execute a drastic program overhaul. Performing radical surgery under time-pressure in an election year maximizes the probability of serious errors. Reagan-era disability policies proved that ill-advised reforms can produce disastrous results. Fortunately, such reckless policies are unlikely to be repeated—precisely because politicians remember what occurred.

Devote more funds for program administration. Democrats and Republicans should both support modest expenditure increases (perhaps $400 million annually) to improve program integrity and to speed up the administrative process. It is a mark of political pathology that Congress damages SSDI’s administrative capacity to detect fraud, even as individual legislators lament (and exaggerate) the amount of fraud that actually exists.

Raise more revenue. Given SSDI’s immediate shortfall and the possibility of chronic deficits, it is sensible to reallocate payroll taxes as the Obama administration suggests, to avert an immediate shortfall. Over the long-run, though, our entire Social Security system, including SSDI, needs greater revenues in some form to maintain its fiscal stability. We would be wise to raise these revenues sooner rather than later.

If recent program changes fail to improve SSDI’s long-term fiscal posture, budget analysts have privately estimated that additional yearly revenues on the order of $35 billion would be needed to permanently balance SSDI’s books. I personally would raise payroll taxes on workers such as myself whose earnings exceed the $118,500 annual tax cap. One might also augment payroll taxes with gasoline taxes or other sources of revenue.

There is no politically or administratively easy path to managing SSDI in a humane and fiscally-sustainable path. The task requires methodical, evidence-based progress over many years. Americans can’t be complacent. They can’t be precipitous, either.  Whatever Congress does, “do no harm” remains the first commandment of disability policy.