The Center's work on 'Financial Status' Issues

Disability Insurance: An Essential Part of Social Security

February 24, 2015 at 11:12 am

With a House subcommittee holding a hearing tomorrow on the future of Disability Insurance (DI), policymakers need to understand that DI is an essential part of Social Security.

Social Security is much more than a retirement program.  It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. Although nobody likes to think that serious sickness or injury might knock them out of the workforce, a young person starting a career today has a one-third chance of dying or qualifying for DI before reaching Social Security’s full retirement age.

More than 150 million workers have earned DI protection through their payroll tax contributions in case they suffer a severe, long-lasting medical impairment.  Nearly 9 million of them, mostly in their 50s and 60s, receive disabled-worker benefits from DI.  (See chart.)

DI’s eligibility criteria are strict (applicants must provide convincing medical evidence from qualified sources, and most applications are denied) and its benefits modest (the average disabled worker receives $1,165 a month, and 99.4 percent get less than $2,500).  DI is essential to recipients and their families, including nearly 2 million dependent children; because its benefits replace, on average, only about half of their lost earnings, DI beneficiaries are far likelier to be poor or near-poor than other Americans.

Social Security’s disability and retirement programs are closely integrated.  Key features are similar or identical for the two programs, including the tax base, the work history required to become insured for benefits, the benefit formula, and cost-of-living adjustments.  And at age 66, DI beneficiaries are seamlessly switched to retirement benefits without filing a fresh application.  (That conversion used to occur at age 65, and the one-year delay is one of the demographic reasons behind DI’s growth.)

Despite those close links, the disability program’s trust fund is separate from the retirement and survivor program.  There’s no longer any good reason for that — the 1979 Advisory Council recommended a merger of the trust funds — but lawmakers instead have relied on periodic reallocations of tax revenue between the two programs to shore up whichever trust fund needed it.  They need to do so again to prevent a sudden, 20-percent cut in payments to vulnerable DI beneficiaries in 2016.

The need to replenish DI isn’t a crisis, nor would reallocating simply “kick the can down the road” as some contend.  Instead it’d allow lawmakers to focus on the real task:  assembling a package of revenue increases and modest benefit reforms to preserve long-term solvency for all of Social Security.  Americans of all ages and incomes support Social Security and are willing to pay for it.

Netherlands Not a Model for U.S. Disability Reforms

February 18, 2015 at 3:06 pm

Critics of Social Security Disability Insurance (DI) often cite the Netherlands —  where several rounds of disability reform have tightened eligibility, trimmed benefits, and imposed greater responsibilities on employers — as a possible model.  But while the Dutch experience may provide useful insights, here are some things you need to know:

  • The Netherlands spends far more than the United States on disability benefits. Even after the reforms, Dutch spending (as a share of gross domestic product or GDP) ranks near the top among the 34 advanced countries tallied by the Organisation for Economic Co-operation and Development.  (See graph.)  The U.S. ranking?  Near the bottom.
  • The Dutch disability programs needed significant reforms; the U.S. programs don’t. Until the mid-1990s, the Netherlands spent six to eight times as much on disability programs as the United States, relative to GDP; even now it spends about twice as much.  The gap has shrunk because the Dutch cut spending, not because the United States expanded it.
  • Overall protection for people in poor health is far more extensive in the Netherlands than in the United States. For example, the Dutch system pays benefits for partial or temporary disability as well as full, permanent disability; DI and Supplemental Security Income only cover very severe impairments that’ll last at least one year or result in death.  The basic Dutch benefit is 75 percent of a worker’s wage; average DI benefits replace about half of past earnings.  Dutch employees get two years of employer-paid sick leave at 70 percent or more of their usual earnings (unless they’ve been on the job for less than two years, in which case the taxpayers pay); the U.S. has no mandatory paid sick leave and a five-month waiting period for DI — a wait that may stretch much longer.  Finally, health coverage is universal in the Netherlands, in contrast to the U.S. patchwork.
  • Adopting Dutch reforms “on the cheap” would be a terrible idea. The Dutch system is carefully integrated, so we shouldn’t just import selected features.  Tasking employers with greater responsibility for paid sick leave, without safeguards like an exemption for the recently hired, could lead to discrimination in hiring and firing.  Similarly, reviewing current beneficiaries under new, stricter criteria (as the Dutch did in 2006) without having a partial-disability system as a backstop would be harsh and even counterproductive, as we learned when a comparable U.S. initiative in the early 1980s unfairly cut off many beneficiaries.

The Disability Insurance Non-Crisis

February 10, 2015 at 2:51 pm

Although the Senate Budget Committee will hold a hearing tomorrow titled “The Coming Crisis: Social Security Disability Trust Fund Insolvency,” Disability Insurance (DI) is not, in fact, in crisis.

Here, briefly, are the facts (see our chart book and blog posts for more):

  • DI’s recent growth stems mostly from well-understood demographic factors. The aging of the baby boomers into their 50s and 60s (peak ages for DI receipt), the rise in women’s labor force participation (which means more women now qualify for benefits), and the rise in Social Security’s full retirement age (which delays DI beneficiaries’ reclassification as retired workers) all contributed to the growth in the DI rolls.  Those pressures are easing, and the DI rolls have barely grown for the last two years (see chart).
  • The need to replenish DI was long anticipated and has a simple solution. Rebalancing payroll taxes between DI and Social Security’s separate Old-Age and Survivors Insurance (OASI) fund, in either direction, is a traditional and historically noncontroversial way to even out the programs’ finances.  Due to the last two such measures, DI now needs more funds soon while the OASI fund doesn’t.  The DI trust fund is expected to run out in 2016 — the same year lawmakers expected back in 1994, when they approved the last rebalancing.  Reallocating a small share of the payroll tax from OASI to DI would avert a 20-percent cut in DI benefits in 2016 and make both the OASI and DI trust funds solvent until 2033.
  • DI’s eligibility standards are strict. Applicants must provide convincing medical evidence from qualified sources, and most applications are denied.  (Those rejected applicants struggle in the labor market, evidence that DI’s standards are indeed stringent.)  The Social Security Administration regularly reviews beneficiaries to weed out those who have recovered.
  • Most DI beneficiaries are older. A typical beneficiary is in his or her late 50s or early 60s, with a high-school education or less and a history of physically demanding jobs.  About 13 percent are veterans.  DI recipients have high mortality rates:  they’re at least three times as likely to die as other people their age.
  • DI benefits are extremely modest. The average disabled worker receives $1,165 a month  and virtually all (99.4 percent) get less than $2,500.  Those benefits make a big difference, since DI beneficiaries — especially those who aren’t married — are far likelier to be poor or near-poor than other people.
  • The United States spends less on disability benefits than most other advanced countries. The United States ranks 26th among the 34 members of the Organisation for Economic Co-operation and Development in spending on disability benefits as a share of the economy.  The Netherlands, which DI critics often propose as a model, spends twice as much as the United States.

Even with its strict standards and modest benefits, this vital part of Social Security offers important protection to all working Americans.

Making Social Security Disability Programs More Efficient

February 5, 2015 at 4:42 pm

An expert panel recommends sensible steps to strengthen program integrity in Social Security’s Disability Insurance (DI) and Supplemental Security Income (SSI) programs so that disability benefits go only to eligible people and in the correct amounts.  The panel, appointed by the Social Security Advisory Board, has outlined improvements in continuing disability reviews (CDRs) as well as other program-integrity tools in the Social Security Administration’s (SSA’s) kit.

Lawmakers should support SSA’s ability to deploy these proven tools instead of making erroneous charges that disability benefits are easy to get or rife with fraud.

CDRs — regular follow-ups of DI and SSI beneficiaries to weed out those who’ve recovered enough to work — lead to termination of benefits in a minority of cases.  About 6 percent of CDRs conducted in 2012 led the agency to stop benefits, though the rate was much lower for adults and higher for children (whose medical conditions tend to be more changeable).

Even with those low termination rates, CDRs more than pay for themselves over time, saving about $10 in benefits for each $1 they cost to conduct, SSA estimates.

The panel suggests boosting CDRs and related efforts by:

  • Providing CDR funding that’s adequate, predictable, and sustained.  Congress should provide dedicated funding that the agency can count on, so that SSA can train and keep the specialized staff that CDRs require.
  • Strengthening other program-integrity tools.  Congress also should support the best practices for avoiding erroneous benefit awards in the first place.  Such practices include pre-effectuation reviews to ensure that people approved for benefits are still eligible before receiving any payments and expanding Cooperative Disability Investigation units to investigate suspicious claims.  SSA needs full and predictable funding for program integrity as a whole, not just for CDRs.
  • Strengthening implementation of the medical improvement review standard (MIRS).  This standard, which Congress enacted unanimously in 1984 in response to the Reagan Administration’s abuse of CDRs to terminate large numbers of DI and SSI beneficiaries, requires SSA to find that a beneficiary’s condition has actually improved before stopping benefits.  The panel regards the standard as an essential safeguard but urges SSA to better train staff on how to evaluate the narrow circumstances in which it doesn’t apply, such as when a beneficiary refuses to cooperate with the CDR or has been helped dramatically by rehabilitation or technological advance.
  • Doing more to help beneficiaries prepare for, and adjust to, the loss of benefits once they are no longer eligible.  The panel suggests that Congress extend beneficiaries’ eligibility for rehabilitation and employment support services for a year after their benefits end.  It also urges SSA to communicate work expectations clearly for beneficiaries most likely to recover so they’re not caught off-guard by their CDR.  That’s especially important for youths turning 18, many of whom lose SSI benefits only to struggle in adulthood.

Funding is key, as the panel’s report makes clear.  SSA’s administrative budget hasn’t kept up with its workload (see graph), and until recently Congress failed even to provide all of the money for CDRs that the 2011 Budget Control Act explicitly permitted.

President Obama’s 2016 budget proposes to address that by providing a reliable stream of money (not subject to annual appropriation) for doing CDRs as well as financial redeterminations in SSI.  Even closer to the panel’s recommendations, Representative Xavier Becerra (D-CA) has introduced a bill to not only guarantee funding for CDRs and redeterminations but also enable SSA to beef up quality reviews before award, detect and prosecute fraud, and recover overpayments.  Such reforms could be included in needed legislation to replenish the DI trust fund.

Obama Budget Would Preserve Disability Benefits While Promoting Thoughtful Reforms

February 4, 2015 at 11:17 am

The President’s 2016 budget shows that he’s serious about running Social Security’s disability programs — Disability Insurance (DI) and Supplemental Security Income (SSI) — tightly without slashing vital benefits.  Lawmakers should follow that approach.

The budget would replenish DI’s trust fund by reallocating payroll tax revenues from the much larger old-age and survivors insurance (OASI) fund.  That would avert a 20-percent cut in disability benefits in 2016 and give the President and Congress time to focus on restoring solvency for Social Security as a whole.  The budget also proposes testing new approaches to help people with disabilities remain in the workforce; policies that prove successful could be part of a future solvency plan.  (The Administration provides further details here, here, and here.)

The budget would:

  • Extend the life of the DI trust fund. Rebalancing payroll taxes between the DI and OASI funds is a traditional — and historically noncontroversial — way to even out the programs’ finances.  Due to the last two such measures, DI now needs more funds soon while the OASI fund doesn’t.  Reallocation doesn’t affect anyone’s taxes and, done right, it would make both the OASI and DI trust funds solvent through 2033.
  • Test strategies to help people with disabilities remain in — or return to — the workforce. The budget would authorize the Social Security Administration (SSA) and partner agencies to test innovative techniques, such as offering services soon after the onset of a disability, to help people with severe impairments remain in the workforce.  If carefully designed, these demonstrations can yield valuable information about the success and cost-effectiveness of such approaches.  That beats rushing headlong into proposals that have no proven efficacy and could cause unintended side effects.  While most DI and SSI beneficiaries can’t work, rehabilitation strategies — in combination with SSA’s work incentives — may modestly reduce the number of people coming on to the rolls and boost the number returning to work.
  • Provide more reliable funding for program integrity. Continuing disability reviews and financial redeterminations of DI and SSI recipients more than pay for themselves over time by weeding out people who should no longer receive benefits.  But erratic funding has produced large backlogs in these reviews.  The President’s budget (like previous Obama budgets) would insulate these essential program-integrity activities from the annual appropriations process and instead ensure steady, multiyear resources.
  • Restrict a person’s concurrent receipt of unemployment and disability benefits. The budget would reduce DI benefits dollar-for-dollar by the amount that a person receives in unemployment insurance benefits.  This approach is fairer than some other harsh proposals to address these overlaps.

Although not specifically targeted at workers with disabilities, the budget’s proposals to make permanent key provisions of the Earned Income Tax Credit (EITC) and Child Tax Credit that are set to expire after 2017, and to expand the EITC modestly for childless and older workers, would also help people with severe impairments who are struggling to work.