Social Security Disability Insurance Is The Social Security Program in Most Dire Need of Reform

The recently published Social Security Trustees Report isn't something that leaves much to be desired, at least in terms of good news. I have discussed Social Security on this blog enough times, whether it is about policy reform, its inefficiencies, or the fact that it is one of the major cost drivers in the federal budget. It should be no surprise that I am hardly a fan of Social Security, and would personally be happy if the United States government created a policy that gradually resulted in the privatization of retirement benefits. There is one aspect of the Social Security program that does not get enough attention but should: Social Security Disability Insurance (SSDI). This might be because the aforementioned Trustees Report projects that the SSDI Trust Fund will be depleted in 2016 (p. 3), which is only in two years! If something is not done within the next two years, those on SSDI will be facing a twenty percent reduction on their benefits, which is hardly flattering.

What is the SSDI? How much should we care about its fund exhaustion in two years? Is there anything that can be done to ameliorate this situation? The Congressional Budget Office (CBO) and its 2012 policy report on SSDI policy alternatives provides a good primer for the discussion. Essentially, the Disability Insurance (DI) program was established back in 1956 to provide cash benefits for non-elderly individuals who were able to work in the past, but are since unable to do so due to a disability. Current SSDI expenditures are about $143B per annum (Trustees Report, p. 32), which makes up about 16 percent of overall Social Security expenditures.

One of the major issues with SSDI is that the ratio of disabled-worker beneficiaries to insured workers [for disabilities], i.e., the prevalence rate, has increased substantially (Congressional Research Service, p. 1). This trend is fueled by many factors, including the increase of Baby Boomers in the labor market (CBO, p. 3), more female workers in the labor force (p. 4), more lax requirements under the 1980 Social Security Disability Amendments (ibid), an increased full retirement age (ibid), and the recession (p. 5). Since the SSDI is a fixed tax, and not based on the number of employees on SSDI, it creates a major disincentive for employers to accommodate workers who have reached enough of a rough patch where they need cash assistance. It's easier for the employer to get the employee on SSDI and hire someone else instead of retaining the employee, which is why the current program discourages work (Maestas et al., 2013; Autor and Duggan, 2010). Work is not as strenuous as it was when the SSDI was enacted in 1956. Many who are considered disabled can still participate in the labor force. The fact that SSDI cannot encourage employment and economic self-sufficiency is a damning statement of its efficacy. To quote the Cato Institute's analysis on SSDI, "SSDI is a classic example of a well-intentioned effort to provide modest support to truly needy people that has exploded into a massive entitlement that is driving up the federal deficit."

What is to be done about the current SSDI system? More from a pragmatic sense, i.e., the Overton Window, something tells me that Congress is not going to willingly eliminate the program. Even in a libertarian context, one could argue for a basic social safety net (the operative word being "basic"). It would certainly be an improvement of SSDI acting as a form of welfare. Assuming that we opt to create a basic safety net for those who become disabled, how can we reform the current system? Let's go through a list of policy reforms on the table:

1. Increase the SSDI tax. Although this might create some additional tax revenues (CBO p. 7), this alternative is as simplistic as it is naive. All this does is encourage the same disincentives while creating further disincentives that taxes typically do. Plus, let's remember that DI rolls are going to outpace population growth, which means further deficits. Further tax burden on a declining labor force participation rate is simply a bad idea.
2. Decrease benefits through changing the DI Benefit Formula. The government can adjust the primary insurance amount factors and the bend points (CBO, p. 12), which would decrease the outlays, thereby making the program more solvent. 
3. Require stricter eligibility requirements. As the CBO brought up (p. 4), there have been more lax requirements based on more subjective determinations. The other issue is that one could qualify for SSDI by combining non-severe disabilities to count as "one severe disability," whereas it was only possible prior to if there was a severe disability. There needs to be a more clear-cut set of rules [than what we have now] of what is defined as a severe disability. Based on the current finances, we cannot fund and try to save everybody, which is why if we are to create a basic social safety net, it needs to go to those who need it the most. In that vein, it would also be a good idea to require applicants to have more work experience (CBO, p. 14)
4. Create an "experience rated" tax system. Instead of making the government responsible for paying disability insurance, this policy would shift the burden more directly onto the employer. This is not a policy alternative that was recommended by the Right-leaning American Enterprise Institute. It is also joint policy alternative by the Left-leaning Center for American Progress (CAP) and the centrist Brookings Institution. I'm not all that enthused about mandating that employers pay a certain amount to disability insurance. However, I also have to realize that the government is doing that already with SSDI. At least this policy would keep the insurance in the private sector. Furthermore, since there would be vocational support and short-term wage replacement, this policy would actually encourage disabled workers to return to work, but it would also decelerate the growth of people receiving SSDI benefits. There would also be the advantage of incentivizing employers to interact with private disability insurers at the onset of the disability. 
5. Relegate fraud monitoring to the private sector. The Social Security Administration (SSA) is not the best at detecting SSDI fraud. If Dutch disability insurance reform has taught us anything, it's that employers and private insurance companies can monitor and detect fraud better than the federal government (Van Sonsbeek, 2011).
6. Demonstration programs. The folks over at the Brookings Institution came up with the idea of implementing various programs to reform SSDI. Much of it is surrounded the idea of targeting disabled employees at the onset, although the third demonstration program is essentially the joint program by Brookings and CAP mentioned in Point 4.
7. Modify the waiting period. The current waiting period before one receives SSDI benefits is five months. The CBO suggested two modifications: eliminating the waiting period and extending it to twelve months. I would be more prone to opt for a longer waiting period (CBO, p. 14). Not only does it deter individuals from gaming the system, but it also decrease the outlays by 7 percent in 2037 (p. 7).
8. Create a $1-for-$2 offset. The premise behind this offset is to ease the phase-out of the benefits. There ends up being a dollar reduction in benefits for each two dollars in earnings the beneficiary earns above the substantial gainful activity (SGA). Preliminary studies show the program to have improvements over the status quo (Wang, 2012; Benítez-Silva et al., 2010).
9. Create a generalized period offset. What this policy alternative would be a more intense version of the $1-for-$2 offset. The $1-for-$2 offset essentially acts as a de facto increased marginal tax rate on beneficiaries. This offset would theoretically solve the cash cliff issue. Due to time constraints on my end, I will simply post this Cato Institute analysis here.

Postscript: In order to mitigate the mess of SSDI, you need to address the incentive structure to make sure it encourages employment and its current finances, the latter of which means you need to decrease expenditures and enact more stringent requirements. Whichever combination of policies that can pull that off would certainly be an improvement over the status quo.