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The Economist — Disability insurance: Not Working

January 23, 2015

Disability insurance: Not working
The Economist, January 23, 2015

For years, Doug, who lives in Binghamton, New York, suffered from bipolar disorder. In 2003 he enrolled in the federal disability insurance (DI) programme. With his illness now properly treated, he has been looking for work since 2013, without much luck. Because he worked full-time in a shop a decade ago, he would lose his disability benefits if he returned to full-time work now. He worries that he couldn’t handle it, and would end up without a job or benefits. So he is hunting for part-time work that won’t overtax him, and will let him keep his benefits.

His dilemma is about to get even trickier. DI, on which he depends, is fast running out of money. In the past quarter-century the share of working-age Americans on disability has doubled, to 5% (see chart). Some 11m Americans—9m workers plus their dependants—now receive benefits, nearly as many as work in manufacturing. The result is that DI now pays out far more in benefits than it receives in payroll tax. Its trust fund will run dry by the end of 2016.

When danger-point has been reached in previous years, money has been shifted to DI from payroll tax or the Social Security trust fund (which is meant to cover public pensions); but a rule passed this month by the House of Representatives says this cannot be done any more without reform. Republicans say this will force Congress to grapple with the problem. Maybe.

The programme owes its dire state, in part, to the same demographic forces undermining Social Security and Medicare. Baby-boomers who haven’t yet retired are now at the age when they are most likely to become disabled. Their numbers have been swollen by the entry of more women to the workforce. And a gradually rising retirement age means beneficiaries collect disability payments longer before they switch to a pension. 

But demography explains only a bit more than half the rise in the rolls since 1980, according to the Congressional Budget Office and Federal Reserve Bank of San Francisco. The rest is because workers of any age or sex are now much more likely to qualify. Americans are no sicker than before. As David Autor of MIT and Mark Duggan of Stanford note, the number of 40- to 59-year-olds reporting any kind of disability has remained stable at about 10%. The health of older workers has improved.

However, in 1984 the eligibility criteria were changed. It is now easier to qualify with hard-to-verify ailments, such as mental illness and back pain. Meanwhile, wage stagnation among the low-skilled makes disability benefits—which come with automatic annual increases and health insurance—more appealing, especially during recessions. One study found that ten years after starting on disability benefits, less than 4% of recipients had returned to work.

Some people are ripping off the programme. Last year New York City prosecutors charged 134 people for defrauding DI of about $30m. Applicants, many of them former police officers or firemen, were coached in how to fake psychiatric illnesses such as depression or anxiety. Many were plainly not disabled; one flew a helicopter, another rode a jet-ski and one taught martial arts. But fraud is only a small part of the problem. DI’s whole design is antiquated. It presumes that people, once disabled, cannot work. If they do, they usually lose their benefits. Yet lots of people with disabilities can work: wheelchairs did not stop FDR from becoming president or Greg Abbott (pictured) from becoming governor of Texas.

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