Brookings Rethinks...Disability Insurance

We have been working our way through the “15 Ways to Rethink the Budget” report from the Brookings Institution’s Hamilton Project. Previously, we covered their defense proposals, reforms to Medicare, and tax expenditure proposals. In this post, we will examine a paper that takes a look at the Social Security Disability Insurance system, particularly the misaligned incentives for employers and state governments to discourage disabled individuals from continuing to work when possible and its underinvestment in the administrative capacity of the system.This paper offers two groups of proposals for cutting costs in the DI system that also have the potential to improve outcomes for beneficiaries. These, along with policies proposed by CRFB Senior Policy Director Marc Goldwein, should definitely be on the table as part of disability reform.

Background: What’s Wrong With the Disability Insurance System

Jeffrey Liebman of Harvard University and Jack Smalligan of the White House Office of Management and Budget (OMB) explain that disability insurance is a costly program because it attracts older but pre-retirement age individuals much more so than it does younger workers or those who are eligible for Medicare and the old-age portion of Social Security. As the baby boom generation moves into the latter two programs, the CBO does estimate that DI spending will fall by 0.1 percent of GDP over the next decade.

Regardless, the DI program in its current form is not delivering what beneficiaries need. Essentially, the program offers beneficiaries lifetime cash benefits in exchange for them agreeing not to do substantial work again. The number of people who go on the DI rolls for the rest of their lives has grown in recent years due to changes in low-skill labor markets and a decline in other forms of public assistance. The authors also point out issues with the program’s misaligned incentives, distortion of labor supply, and a disability determination system that moves slowly, forcing beneficiaries to endure long waits for decisions and generating a backlog of applications. 

To resolve the issues with the DI program, Liebman and Smalligan advocate focusing on demonstration projects and providing new tools for a newly appointed Social Security commissioner.

Policy Recommendation 1: Demonstration Projects

Under the category of demonstration projects, they emphasize the need for early intervention with DI beneficiaries, pointing to research that has shown that after someone starts receiving benefits or even begins the application process, it is often too late to get him or her back in the workforce.

One such project that they suggest involves screening the applicant pool for individuals who probably could go back to work and offering them temporary cash benefits, wage subsidies, and other support in exchange for withdrawing their DI applications. This would lessen the need for long-term costs that result from individuals going on DI for life who would otherwise still be able to work.

The authors also note the value of early intervention projects targeted to states and employers, calling for empowering states to reorganize funding streams in order to target populations who are at risk of going on DI permanently with programs that reduce the likelihood of their becoming dependent on disability insurance payments. In order to create an incentive for employers to keep workers from resorting to disability insurance quickly, they propose replacing federal disability insurance with mandatory private disability insurance for the first two years that an individual receives benefits and creating an experience rating system for benefits payments similar to that used in the unemployment system.

Policy Recommendation 2: New Tools for the Social Security Commissioner

The tools that Liebman and Smalligan call for the new Social Security commissioner to have are aimed at eliminating the current problem of underinvestment in the administrative capacity of the disability system, in part by making the Disability Determination Services (DDS) program a mandatory, rather than discretionary, expenditure. They note that actuaries have estimated that every dollar spent on disability determination reviews saves $9 in benefits expenditures in the future, which is a clear argument for avoiding the kind of backlog of applications that has built up lately.

Looking Forward

The Brookings report closes with a three-part case on why now is the time to act on DI reform. The need for deficit reduction has brought entitlement reform issues to policymakers’ attention. The new presidential term and the appointment of a new Social Security commissioner provide the chance for a fresh start. Finally, the DI trust fund will be exhausted by 2016, at which point benefits will be cut automatically by 20 percent, so something needs to be done before then. Liebman and Smalligan argue that they present a set of measures that will save money and also help beneficiaries either get back to work or have their claims resolved more efficiently if working is not an option. If this is true, following their recommendations would be a wise step to both safeguard our fiscal health as well as better serve the beneficiaries of the disability program.

CRFB has previously written about the importance of addressing the DI program and not resorting to a transfer from other parts of the Social Security budget in order to fund it when its trust fund runs out in 2016. The logic is straightforward: we need to either reduce the benefits that the DI program pays out, or increase its revenues. Liebman and Smalligan’s report advances a proposal that minimizes the benefits that must be paid out in the years to come without depriving beneficiaries of the support that they need.