Yes, SSDI Needs Restructured

Paul Krugman goes on a tear against those who would question Social Security Disability Insurance:

If you want to understand the trouble Republicans are in, one good place to start is with the obsession the right has lately developed with the rising disability rolls. The growing number of Americans receiving disability payments has, for many on the right, become a symbol of our economic and moral decay; we’re becoming a nation of malingerers.

He enlists the help of Jared Bernstein to make the point that, adjusting for age and sex, disability enrollment has been rising more smoothly than the headline number would suggest.

Now I get the mentality here. Conservatives are probably making some legitimately dumb arguments (although I haven’t seen any of these specifically). The impulse to circle the wagons here is understandable, but they are wrong…and it isn’t just wild, reality-challenged conservatives that are making this case. MIT economist David Autor, of whom Krugman is a fan, also makes the argument in this sweeping paper. The truth is SSDI is a genuinely poorly designed program that has a raft of bad incentives built in — and conflicts directly with the goals of the Americans with Disabilities Act of 1990.

There are two major problems I have with Krugman’s (and Bernstein’s) analysis of this issue. The first is that regardless of demographic changes, SSDI rolls are expanding quite a bit. The reality of the situation is that the type of person that is supported by SSDI has changed drastically since the liberalization in 1984…and that changes the dynamics and sustainability of its financing. Where SSDI was once supporting people suffering from chronic (and quickly fatal) illness (heart disease and cancer were the big two), it is now overwhelmingly supporting people with (very hard to verify) soft tissue pain and mental illness. What this implies is that the lifetime payout of each claimant is much higher. The present value of SSDI benefits for someone in their mid-40’s right now is approximately $275,000. This segues nicely into my second point.

Jared Bernstein, at his blog, makes the point that SSDI enrollment is not cyclical. This is wildly untrue. Applications strongly track the unemployment rate:


Much evidence shows that workers are disproportionately likely to apply for SSDI benefits when they involuntarily lose work—even if their job loss is unrelated to their health. For example, Black, Daniel and Sanders (2002) providing striking evidence that disability applications from the Appalachian coal mining regions of the U.S. spike when energy prices fall. Since it is unlikely that energy prices directly affect disability, this evidence highlights that when firms engage in layoffs—e.g., by closing mines—it greatly increases the odds that their (former) workers seek and ultimately obtain SSDI benefits.

Now it is probable that what Bernstein had in mind was not applications (though he shows a chart of applications), but that the number of people actually on SSDI rolls is not cyclical, and that is true…but that is not a benign point, as Krugman and Bernstein would have you believe. The stated mission of the Americans With Disabilities Act was to provide the dignity of employment to those who are disabled. The goal was to empower people with disabilities. SSDI is literally the opposite. The incentive structure is such that it actively discourages work. Example: you have to be unemployed to qualify for application, and remain unemployed for the duration of your application period, sometimes up to three years (and that is no guarantee you will be accepted)! Also, you get thrown off the rolls if you earn too much money too often. The average payout for a SSDI claimant is $1,100 a month, plus the cash value of Medicare benefits (which is equal or greater)…and remember, this is a guaranteed cash annuity from the US government (as Karl Smith would say, this is the thing you want). This is far from a great lifestyle by any stretch of the imagination, but think about the marginal worker (a low-wage service worker, or someone close to retirement age), facing great uncertainty. Would they have the incentive to give up SSDI and go back to work if they got on SSDI…given accomodations?..even after recovery?

As you can see from the chart above, there was a big purge in the late 70’s/early 80’s. This is what prompted the liberalization in 84 (which was much more expansive than Krugman leads on). Prior to that, people left largely because they died…however since then very few people leave the SSDI rolls.

And this doesn’t even touch on the fact that the Social Security Administration sends ~$1 billion a year directly to disability attorneys.

Now, I don’t want everyone to walk away from this post thinking that I think SSDI is illegitimate, because I don’t. However, I think that in their zeal to defend the welfare state, leftist liberals find themselves making excuses (and erroneous ones at that) for poorly designed programs, just because they exist. Between 89 and 09, cash payments to SSDI recipients tripled, and Medicate payments rose 280%. But it is not the rise in payment that is actually the problem, it is the incentive structure.

Update: For anyone wondering, the spike in the above chart in the 90’s was the result of a 1996 law outlawing the provision of disability benefits for drug and alcohol addiction.

Full Disclosure: I, personally, know an individual who could accurately be described as a “taker”, who uses every trick he can find to exploit and manipulate people and situations, who is fraudulently attempting to get approved for SSDI. And my sister and mother are on SSDI (both legitimately).


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