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Paid To Be 'Stuck'?

Paid To Be 'Stuck'? published on

Words matter. So when a recent article in the Wall Street Journal Online proclaims “Workers Stuck in Disability Stunt Economic Recovery,” it sets off the incentive alarms. What do you mean by “stuck in disability” and what role do incentives play in that “stuck”-ness? I mean, if you choose to stay in a sticky situation, are you really stuck?

The quick background:
A very large number of people were disabled by the recent recession (i.e., the number of people who were placed on federal disability jumped dramatically, even by historical standards). The preponderance of this increase in “disability” came from people who were no more disabled than they had been previously. Rather, they are people who lost jobs that they were previously able to endure but jobs they were not able to replace. In short, the new “disability” was really the inability to find new jobs given whatever physical limitations individuals claimed to have, not the physical limitations themselves. This was compounded by States that were able to reduce their welfare and Medicaid costs by shifting people to Social Security disability (SSDI) and Medicare.

Now people are not getting off of disability as rapidly as they have after recessions past. While the official unemployment has been falling of late, it has more reflected a decrease in the labor participation rate than an increase in the number of jobs. The percentage of working-age adults who are in the labor market has decreased, and almost half of that decrease is a result of people moving into “disability” status. Fewer people in the labor market not only makes unemployment look better than it really is, but it also puts a drag on the economy as fewer workers are available to take jobs (supply of labor decreases) and make “stuff”. And “stuff” is what makes the market economy go ’round. If that wasn’t bad enough news, the high disability rate is now predicted to bankrupt the current SSDI system in the next three years.

So, are people really “stuck in disability”?In short, no–at least not a good percentage of them. That is, unless by “stuck” you mean that they would prefer to stay on disability because the net value of disability payments are higher than the net value of job opportunities. That doesn’t mean that disability pays more than working, but that the marginal value of working is less than the cost of actually having to do the work.

In a 2011 paper, David Autor (MIT and National Bureau of Economic Research) addresses what he identifies as two critical “ailments” of the US federal disability program. First, the program creates poor incentives among workers and employers:

The program provides strong incentives to applicants and beneficiaries to remain out of the labor force permanently, and it provides no incentive to employers to implement cost-effective accommodations that would enable disabled employees to remain on the job. Consequently, large numbers of work-capable individuals voluntarily exit the labor force, apply for, and ultimately receive SSDI annually. In 2010, fully 2 percent of the SSDI-insured population—2.9 million workers—applied for SSDI benefits. Somewhere between 50 and 60 percent of applicants will eventually receive an award. But even those who are ultimately denied benefits will spend substantial time—typically one to three years—out of the labor force before they have exhausted all appeals. At that point, their reemployment prospects may be substantially worse than they were at the time of initial application.

The second problem is the escalating cost of the SSDI program noted above. SSDI payments have grown twice as fast as all other Social Security expenditures. The percentage of civilian workforce on disability is now 5.4% compared with 1.7% in 1970 (before a slew of occupational safety regulations were imposed) and compared with 2.3% in the mid-1980s (after the scope of disabilities were broadened to include more vague and difficult-to-assess ailments). Of course, these two problems are related. As Autor writes:

The two ailments facing the SSDI program are closely linked, as discussed below. The SSDI program is growing in size and cost in substantial part because it is supporting a rising rate of dependency and a declining rate of labor force participation among working-age adults. Addressing the twin policy challenges of poor incentives and mounting expenses will require amending the flawed incentive structure at the SSDI program’s core.
The SSDI safety net is a well-intentioned and perhaps even necessary program intended to protect those individuals who have serious physical and mental disabilities that prohibit them from gainful employment. There are undoubtedly many for whom disability is the only option, not just the best option. They are truly “stuck”. However, there is ample evidence to show that there is a significant number of people who are not “stuck” in disability, but who are simply responding to incentives that make disability a more desirable option than working. If one chooses to be stuck, they aren’t really stuck.

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