What Entitlement Program Will Go Broke First?

Jul 15, 2013

Photograph: 401(K) 2012 on Flickr. Licensed under a Creative Commons Attribution-ShareAlike 2.0 Generic license.

What federal entitlement program is closest to fiscal collapse?

Medicare? No.

Social Security? Negative.

Medicaid? Uh-uh.

While the three above are in peril, the “award” goes to the Social Security Disability Insurance Fund (SSDI), which is expected to run out of money in 2016.

In the Wall Street Journal, economist Michael Boskin notes the explosion in the people using it and SSDI’s costs:

The number of people collecting disability benefits has soared, especially in recent years, to almost 11 million in June, up from 2.7 million in 1970. The 2012 price tag was $140 billion, up eightfold, adjusted for inflation, from 1970.

In a 2011 paper, MIT economist David Autor put these costs in the context of the rest of the federal budget [h/t Reihan Salam]:

In 2010, SSDI cash transfer payments totaled $124 billion, while the cost of Medicare for SSDI beneficiaries was $59 billion. These outlays, exceeding $1,500 for every U.S. household, comprised 7.3 percent of federal non-defense spending last year—a sum that is larger than interest payments on the federal debt. In the last two decades, outlays grew at 5.6 percent in real terms, compared to just 2.2 percent for all other Social Security spending. As a consequence SSDI’s share of total Social Security outlays has risen from one in ten dollars in 1988 to almost one in five dollars at present. Perhaps most ominously, SSDI expenditures now exceed by 30 percent the payroll tax revenue dedicated to funding the program.

By expanding the medical conditions that qualify and increasing payments, SSDI has turned into something it wasn’t originally designed to be writes Boskin: “Disability insurance has clearly become, in part, a form of extended unemployment insurance and early retirement, with Medicare benefits.”

This was covered by FreeEnterprise.com in April:

[A]n extensive April 10 report from the Wall Street Journal dug into the explosion in Americans covered by the Social Security Disability Insurance Program since 2007. The number of Americans on federal disability grew by a half million over the course of the 2007-2009 recession, from 7.1 million to 7.6 million.

But since the recession’s end in June 2009, that number has swelled to a historically high 8.9 million. That’s more than double the number of disability beneficiaries in the 1990s, according to Jordan Weissman in The Atlantic, who notes that the eligibility requirements for disability have been relaxed at the same time jobs have grown more scarce.

A significant proportion of the former workers on disability are below the age of 50, the Journal notes. Based on the statistics, it’s unlikely that these workers will rejoin the labor force. In 2011, the Journal report finds, only .5 percent of disability recipients left the program to return to work.

In March, a National Public Radio (NPR) reporter explored the growth of the disability rolls and found that the disability program was essentially serving to “hide” workers who may not be disabled, but are otherwise unemployable due to changes in the economy—suggesting the real unemployment rate is significantly higher than the official 7.6 percent rate.

"That's a kind of ugly secret of the American labor market," David Autor, an economist at Massachusetts Institute of Technology, tells NPR. "Part of the reason our unemployment rates have been low, until recently, is that a lot of people who would have trouble finding jobs are on a different program."

[As a side note, the fact that millions move from being unemployed to being disabled indicates how weak our economy is and how critical pro-growth, job-creating policies are.]

To prevent the SSDI’s collapse Boskin recommends that the program better target the truly disabled:

Eligibility should emphasize objective medical—as opposed to more subjective and vocational—criteria, with a more rigorous appeals process for potential false rejections of meritorious but difficult-to-verify claims. About 40% of disability awards now follow appeals, of which a large majority are successful.

Next, offer better incentives to return to work for those who can. This means early intervention and providing information about job options—before people lose any attachment to the labor market and their skills deteriorate. Today, the disability-insurance program hardly focuses on the return to work. It is a Hotel California—you check in with a disability and don't leave unless you die or convert to Social Security retirement at age 66. In 2009 only a tiny percentage of those on disability, 0.8%, returned to work or gave up the benefits for other reasons.

He hopes fixing SSDI can be a springboard to broader entitlement reform:

With luck, the looming implosion of the Disability Insurance Fund will focus attention on other entitlements (and may dampen some of the happy talk now heard in Washington about the health of Social Security and Medicare). Coming to grips with the disability program also may provide a guide to reform of the larger programs.

The clock's ticking on SSDI, and we can't afford to ignore it.

To learn more about SSDI’s fiscal troubles, listen to Econtalk podcast host Russ Roberts interview Autor in April 2012.

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