|Intro. [Recording date: April 2, 2012.] Russ: Lift a veil covering a phenomenon that is extremely important and very little known: what is going on with the government-run disability insurance program here in the United States. It's part of the Social Security program. Today's discussion will draw on a recent working paper of David's. Let's start with some basics. What's the idea behind the insurance program; when did it start; how is it funded? Guest: The Social Security Disability Insurance (SSDI) program was started in 1956. Its intention is to insure workers against loss of income and access to health care in the event of a work-limiting disability that ends their careers prior to their reaching full retirement age. It's paid for by a part of the payroll tax; essentially 1.6% of earnings up to a certain amount annually is devoted to the SSDI program. So, after you work approximately 5 years at a fairly high level of participation--so pretty much full time--you will be insured under this program. And then, if you are insured, should you become disabled you can apply for and qualify for SSDI benefits. Russ: And if you are approved, if your application is accepted, what is the benefit level? Guest: A typical recipient will at this point receive benefits of about $1100 a month in cash benefits and that is indexed to inflation, so it rises over time in nominal terms to keep pace with the growth of prices. In addition, two years after the onset of a disability you would get access to the government's Medicare program, which is the same health insurance program that retired Americans get and that's quite a generous program. So, at this point probably the value of the medical benefit for many individuals is as high as the value of the cash benefit. And I should say, this is not a huge amount of money, and it's not a great lifestyle by any stretch of the imagination. However, the $1100/month figure probably understates the value of that benefit because you need to remember that that's guaranteed income for the rest of your life, or until you reach retirement age and continue to receive the same benefit. It's guaranteed income indexed to inflation with the government behind it, so the closest financial product presumably would be an annuity, which would be a guaranteed stipend until such time that you no longer have financial needs. Russ: You said the benefit is on average $1100 a month. Is it tied to your earnings history, in the same way as Social Security is? Guest: It is. It's calculated exactly the same way your Social Security retirement benefit would be calculated, except using a shorter earnings history. So, the first small amount of income is replaced as 90%, then at 32%, then at 15%. So the benefits can get reasonably high; for someone with very high earnings you might have a Social Security Disability benefit as high as $2500-$3000 a month. I don't think it can go higher than that at present. Russ: So as much as $30,000 a year at the high end. Guest: Yeah. For someone who is getting that, that would be a small percentage of their prior earnings. So the replacement is actually higher for lower income earners. Russ: There is a redistributive kick in the system. Guest: That's right. It's meant to be progressive. On the other hand the taxation is regressive.
|Russ: Let's talk about the taxation of your disability insurance benefit. So, if you are disabled--and we are going to talk in a minute about what that literally means, but let's leave it vague for now. If you are disabled and you are not working, and you are getting this benefit, what if you work a little bit? Does the benefit go down, stay the same? Or are you not allowed to work at all because you are disabled? Guest: So, there is what is called a Substantial Gainful Activity (SGA) threshold, which a couple of years ago was $1000/month. Now rises at approximately at the rate of inflation. And essentially what it means is that if you earn more than SGA, you are in theory not disabled from the perspective of the Social Security Administration. They typically will reduce your benefits. You may lose your benefits for a month if you work above SGA. If you do it frequently, your benefits will be reviewed and you may lose access to the program. You can be viewed as having recovered. Russ: And how do they--of course, if you could make some money on the side, you wouldn't want to advertise it. Guest: Sure. So, you have to basically be making money under the table. The thing is not by intention but the program creates a very strong incentive against meaningfully participating in the formal labor market. Because once you receive the benefit, as I said, it's an annuity; so the kind of present value of someone of a disability award for someone in their mid-to-late-40s is something like $275,000. So, it's the equivalent of someone giving you $275,000 in cash all at once and allowing you to invest it, allowing you to live on the returns to that investment. You don't want to, let's say you have a work limitation, you receive SS Disability, and then you say, now that I look at it I could work maybe half time at a low wage job, and I would probably make $1500 a month and I am pretty confident I could go on with that for a while. Well, that's a pretty risky proposition relative to continuing to receive guaranteed cash income in medical care, in indexed income inflation. So you might be extremely reluctant to forgo that for the workforce, to face marginal living relative to the marginal secure living you would have on the SSDI program. Russ: But the bottom line is that if I am receiving those disability insurance payments and I take a job that's part of the payroll system--that is, if I am going to be paying payroll taxes with the same social security number--then the Social Security Administration (SSA) would recognize that, and that would put my benefits in jeopardy. Guest: Correct. Russ: So if I want to supplement my payments, and I'm physically capable of doing it in some way, I'm going to have a strong incentive to do it under the table, cash business. Guest: Sure, absolutely. Russ: But we don't have any idea how big that is. Guest: We don't know how much of that goes on. It's very difficult to measure. Understandably. Russ: By definition. But the reason we might think that could happen is the definition of disability is not necessarily what we think of. I think some of us have in mind disabled means bedridden or unable to work. But of course that's not literally how it works in practice. How does it work in practice? Guest: Good question. So, the definition of disability used by the SSA adopted by Congress in 1956 is one based on employment more than health. The substance of the definition is that you are unable to engage in substantial gainful activity in the U.S. economy for a reason of health or disability. But what it really means is that you are not able to work; and you have to demonstrate to the SSA that you are unable to work; and the reason you are unable to work has to have something to do with your health. It could be your physical health or your mental health. So, it's a very elastic definition. For example, when the unemployment rate is high, there are very few jobs; you may be unable to work because the type of health limitation you have means that the type of job you would be able to do is not available at present. And that would qualify as a disability. Disability is not a medical term; there is no medical diagnosis called disability. There are medical diagnoses for a variety of illnesses, but disability is just a broad category that is a societal definition: What do we want to deem as unable to work? Because that definition is very elastic--and Congress has made it much more so over time--it makes it possible for many people who have been out of the labor force for a while and are motivated to receive benefits to potentially qualify for the program. One thing that's very telling about that is 25-30 years ago the predominant source of new claims for people going onto the SSDI program were cancers and heart disease; and those comprised more than half of all of the claims. That was the early 1990s. At present more than half of all awards are for mental disorders and musculoskeletal disorders. Mental disorders are things like nervous disorders, schizophrenia, and musculoskeletal disorders are basically back disorders. Russ: Carpal tunnel. Guest: Yes. And those disorders are very difficult to verify. So, soft-tissue pain is difficult to prove or disprove; not observable. Obviously if you have a damaged disc in your back, that's observable. Soft tissue pain is not. Mental disorders--we don't really have a way to objectively verify most mental disorders. So it means that a motivated claimant can attempt to establish that they in fact do have those disorders and they stand in the way of their working; and the SSA doesn't really have the right to say: We don't believe you. Unless they can produce some direct evidence that you are engaging in fraud or deceit.
|Russ: So, let me take an example. I'm a stevedore--a word I don't get to use very often--meaning a person who works through physical labor, say on a loading dock in a port. And I hurt my back. I really do hurt my back; there's no fake or fraud here; and I can't be a stevedore any more. I just physically can't do it. But of course there are lots of other jobs I can do, maybe not as pleasantly, not as well, won't pay as much. But in that case, can I get Disability? Just because I can't be a stevedore? Guest: It depends on whether there's another job the SSA thinks that you can do. And partly that depends on how trainable they think you are. So, typically, the criteria actually change as a function of your age and education. Say that happened to you when you were 45 and you were a stevedore but you had some college education, they'd say: There's a lot of sedentary work you could do that would use your numeracy and literary skills. So, we might be unlikely to deem you disabled. Let's say instead you were 55 and you had no more than a high school education. Then they'd say: Well, you are getting on in years and you are not highly educated so you are difficult to retrain; so we would essentially say if you can't do your old job, you can't do any job, and you would receive Disability. It's sort of like you have a car insurance policy and you have an accident in an old car and you bring it into the body shop and the body shop says: Well, that could be fixed but it's going to cost $7000; insurance company says, yes, it can be fixed but it's not worth the money so we'll just call it totaled. That's sort of what the SSA does with people who are over 55 and have low education. Russ: So, the other aspect of this is if technology changes on the dock and stevedores are no longer employable and everybody's fine physically, that there is a temptation of course to feel that your back hurts. Because, as you said, in the other case with unemployment and during a recession, here's a case of technological change, structural change in the economy, it's going to be hard to find work. Presumably some stevedores will find something, maybe doesn't pay as well as it did before; but others find that their back hurts. Is that what's going on, do we think? Guest: Yes, absolutely. And it's not as nefarious as it sounds. There are many people who apply for disability when they've been unemployed for a considerable period of time, and it's often because they've exhausted all their other options. As I said, it's not a lifestyle that any of us would want to choose, however it's better than unemployment without benefits and no prospect of work in the near future. There's a classic study by Kermit Daniel, Seth Sanders, and Dan Black that looks at coal workers in Appalachia and essentially shows that when coal prices plummet, disability applications and disability awards from the Appalachia region rise very rapidly. And it's not because people become disabled when the price of coal or the price of energy declines. It's because they lose jobs. And if you've lost work and don't have other options and have some underlying health conditions, it makes it much easier to make the claim that you are unable to engage in substantial gainful activity in the U.S. economy, because the type of job you did is no longer available and your health is in the way of your doing some other job. So, disability claims rise very rapidly when the unemployment rate rises. And we've seen a dramatic increase. So, for example in 2011 there were 2.9 million applications for SSDI; that compares, let's say, to 2005 when there were 2.1 million applications; or in 1999, when the economy was actually doing quite well, when there were 1.2 million. So from 1999 to 2011 the number of applications rose by 1.6 million. More than doubled. Russ: From 1.2 to 2.9 million. Guest: Right. So, currently there are 8.6 million disabled adults receiving SSDI benefits, about 4.7% of all adults aged 25-64 in the United States. So, it's roughly 1 in 20, a substantial number. And the cost of the program is also very substantial. So, approximately $130 billion a year in cash payments are made through SSDI, and then the Medicare component adds another $70 billion to that. So you are talking about basically a $200 billion dollar program at this point. So if you even just divide that by the number of U.S. households, it's over $1500 in expenditure per U.S. household; if you think about it, that's ultimately coming from taxpayers. It's not at all a negligible program; in fact, it's a very large government program. Russ: So, let's again put this in perspective over time. You told us that from 1999 to 2011 there was a more than doubling of applications. Now you just gave us a number--was this for 2009, the 8.6 million number? Guest: That is for 2011. Russ: So, in the most recent data, 1 in 20 Americans of age 25-64, one measure of working age, are receiving disability. Give me a number in the past that I can compare that to. Guest: Sure. So in 1981, let's say, about 2.2%, 2.3% of adults ages 25-64 were receiving SSDI. So the fraction of the population receiving it has doubled. Russ: And it's more than doubled in terms of the actual number on the rolls, because the workforce was smaller and the population was smaller in 1981. So we've had at least a 4 million person increase in the number of people classified as disabled, certainly receiving disability. Guest: There's been a 4 million increase just since 1997. Russ: Whoa. So, that's a nontrivial portion of the entire workforce. Guest: Absolutely. It's a very large number; and it's a very enormous expenditure. And I should say that the program is growing in a way that even at a point in time one would understate the actual size it's sort of tending towards, because as I mentioned earlier, the population who go on the disability program are increasingly likely to be awarded benefits due to back pain or mental illness; those are diseases with relatively early onset. They could easily start in your 40s. And they have very low mortality. Which means that people will be on the program for many years. It used to be that, and typically when people go on with dread diseases like cancer or heart disease, they don't tend to live very long. And so they are on the rolls and off the rolls a couple of years later. For very unfortunate reasons. The more recent crop of impairments for which people are receiving benefits, they may be on the program for 15 or 20 years prior to reaching full retirement age. At which point they transfer to the SS retirement system. So the kind of net benefit they will receive over their lifetime is much, much greater than previous generations of disability benefit receivers.
|Russ: This raises the obvious question: The U.S. workforce, job distribution in the United States over the last 30, 40, 50, 60 years has gotten safer in two dimensions. People are doing less dangerous things in general, and the things that are dangerous are getting safer. So, it raises the puzzle, which is how could the work environment seem more disabling? It appears to be, or there could be something else going on. There appears to be an epidemic of disability, and enormous increase, which if we didn't know anything we'd say: Well, I guess people are getting hurt more on the job. But as you point out these impairments are not what we think of as disability traditionally, people losing an arm in an agricultural accident or a mining accident, or as you point out, heart disease. Guest: Actually, there are two dimensions to this that are counterintuitive. One is actually there is a very small percentage of people who go on SSDI actually transition from Worker's Compensation (Worker's Comp) or acute workplace injury. It's certainly not, it was never the case and even less the case now that people are getting hurt on the job and going on disability. That's definitely not occurring. And the other thing, is jobs have gotten safer. They are more sedentary. Medical care has greatly improved. And of course ability to provide so-called workplace accommodations--technology that allows people with work limitations to still be productive on the job. Those things have all improved dramatically in the 50 years since the SSDI program was introduced. Even if population health were holding constant, there ought to be fewer and fewer people who are effectively disabled because of course the types of jobs they need to do require less and less physical capability. So, it is indeed quite surprising from that perspective that we should see an epidemic of disability. And I should say there really is no evidence that there is an overall downward trend in population health. In fact, quite the reverse. Lifespans have increased considerably in the last 50 years. Russ: And quality of life. People have artificial knees, hips. Guest: Exactly. So the rate of disability in people over age 65 has declined by some estimates by as much as a quarter in the last 30 years. Most evidence points to the fact that people are generally getting healthier. There are some countervailing indicators, so obesity and diabetes are the two sort of adverse population trends that are working against the health of the U.S. population. Russ: They don't limit your job effectiveness that much. Guest: I'm sure they do somewhat. Certainly diabetes if it's not managed well can be a major hindrance. And obesity limits people's--interferes with health on a variety of levels. But I don't think this is by any stretch of the imagination the major factor behind the rise in the disability rolls. The major factor is the disability system itself. That it's become more accessible; the definition of disability has actually been made considerably more elastic over time. And then the other factor that should not be neglected is that the labor market has gotten to be a much more difficult place for people without moderate to high levels of education. Most people who are on the disability system, the vast majority or a substantial majority, are people without education beyond high school. And typically they are mid-career or older workers who have limited formal education and they get displaced from the workforce and they turn to disability as a last resort. And that's why the program grows so rapidly when the unemployment rate spikes, as it has done over the last several years. So, the combination of a program that is essentially becoming more valuable due to the rising value of medical care, and more accessible due to the liberalizations made by Congress, with a labor market that is becoming less and less forgiving--lower real wages for low-skilled workers, fewer opportunities, and in fact less likelihood of getting health insurance--all of that makes the disability program look a lot more of a good option for many people. Russ: Before I go on, I want to ask one more technical question. A friend of mine, a doctor in the St. Louis area, works in a hospital in a relatively low income area, and he would tell me that a lot of people come in complaining of back pain and other disorders "hoping to get on disability." What role does a doctor have in that process? Guest: Well, quite an important role actually, because the SSA is bound by law--again, this is Congress's decision in 1984--to give sort of first weight to the evidence provided by the disability claimant's own medical counsel. So, if the SSA does contract with what's called a consultative examination for each applicant, it is required by law to take seriously the evidence provided by a claimant more than by its own consultants. And only in cases where it has reason to believe the applicant is distorting the information can it have the right to ignore it. So, there's a very powerful kind of for-profit advocacy component to getting people onto SSDI. So, there are many law firms that specialize just in this practice. And they work with counselors and physicians to build a strong case to support an individual's application. So there's a well-known legal firm in New York called Binder and Binder that alone I think received more than $20 million in 2010 in payments from the SSDI for claims brought against it by plaintiffs, claimants. So, just to clarify how that works--if you apply for disability benefits, if you are denied, you appeal either once or twice. And eventually your case goes up to an Administrative Law Judge; and at that point if you win the case, you get your back benefits. If you are represented by counsel, your counsel gets 25% of those back benefits, up to about $6000. Russ: By law? Guest: By law. I should say that contract is structured to protect claimants from paying higher amounts. Russ: More than 25%. Guest: Exactly. In other words, they don't want them saying you can have 90% of my benefits if you just get me something. Russ: I don't know how to react to that. That's special. Guest: So, the SSA each year pays more than a billion dollars directly to attorneys that prevail against it on behalf of claimants. Russ: It's a wonderful world. I'm just going to let that alone. It's a part of the world I didn't know anything about. It's fascinating.
|Russ: Your comment about recessions raises a question. It's well known that the recoveries from recession in recent years have been "disappointing" in both magnitude of GDP growth and certainly in employment growth. Certainly this recession has been extremely disappointing. But it's not a new phenomenon. It's a recent phenomenon. The 2001 recession had a similar pattern. I think the 1991 recession had a similar pattern. And by that I mean that the job growth, once the economy was deemed to be in recovery, was not of the magnitude that it had been in the past. Guest: Jobless recovery--the rate of employment growth per output was slower than had traditionally been seen. Russ: So, what possible contribution has the liberalization of SSDI played in what we measure as the employment recovery? It's hard to know, obviously. Guest: What it's done typically is it has actually masked the depth of the job market problems; that basically it has absorbed a lot of individuals who would otherwise appear on the rolls as long-term unemployed. I don't think it has contributed to the jobless recovery; it has actually contributed to the illusion of a lower employment rate than we might-- Russ: It's hard to know. One thing we also notice with these recessions, especially since 2001, is a decline in labor force participation. Especially among men. The employment rate among men has been falling relatively steeply since 2001. There was a slight uptick, one piece of that recovery. How much of this SSDI--first of all, how much of the rolls are male versus female? And does that maybe play a role, maybe not in changing the employment numbers but in changing the labor force participation numbers? Guest: Sure. So, it is the case now that the disability program is almost half women. That wasn't true 30 years ago. And an important reason why that wasn't true was that women wouldn't qualify for SSDI because they didn't have enough labor force history. There has been much more rapid growth among women than among men, although there has been substantial growth among both. It certainly does contribute to the declining labor force participation rate, particularly among low-education males. I do think it's significant. I don't think it contributes to the sort of slow rate of job growth, because I tend to think these individuals, many of them would not necessarily be employed. If it were really making the labor market tighter, such that the employment weren't growing because labor weren't available, then we would tend to see wage increases. And we have not seen that. Russ: Maybe they are just smaller than they otherwise would have been. Guest: But yes, I think they are targeting. Russ: Now, you talked about liberalization by Congress. How does that take place? Does the act get revised? Definitions change? Guest: Really interesting story. In the last years of the Carter Administration they were very concerned that the SSDI program was growing too rapidly. And they started a clampdown on applications, you know, trying to slow the rate of inflows by trying to tighten up the eligibility criteria. The Reagan Administration came in and then they liked that idea and they kind of redoubled efforts on that; and they simultaneously trying to aggressively continue doing disability reviews, where you do a review of a claimant's case and terminate them if you determine it's not meritorious. And these two actions--the Reagan Administration was pursuing them with considerable zeal--during the early 1980s, during the deep recession, the deepest post-war recession we had had up until the current one--and they were terminating a lot of people. Both many fewer people were actually being awarded; both many more applications declined, so people stopped applying; and then about 40% of the cases that were reviewed by the SSDI process were summarily terminated. Which, whether you felt that was meritorious or not, that was pretty unfortunate timing if this was coming in the middle of this very deep recession with the unemployment rate about 9%. And so this kind of created almost a civil war. And I believe it was 21 U.S. State Supreme Courts ordered their Social Security Field Offices to stop complying with the continuing disability review process. So the States kind of went into revolt against this clampdown of benefits that was occurring during this very unfortunate time. And eventually Congress reacted to that. It stopped the continuing disability review process; it stopped the clampdown; and it made a number of really substantial changes to how the disability standard would be applied. That then reverberated over the next 25 years. So, one of them was, instead of the previous focus of the disability determination decision had been whether an individual met one of the listed impairment categories or had a number of impairments that came together to equal one of those impairments. So, it was kind of look them up on a big list of possible disabilities and see if they matched. Congress changed the operational definition of disability to the ability to function in a work-like setting. So, again, tying it even more closely to employment. The second thing it did was the SSA had previously tended to not give full weight to claims of mental illness and pain because they were difficult to verify. And Carter said: Well, if they are difficult to verify then you don't know that they are not true. So you have to believe those claims unless you have reason to know they are false. So, that increased the weight given to pain and mental illness. In addition, Congress said that the SSA had to give highest weight to the evidence brought by the claimant rather than its own consultants or examiners. And finally, they changed the rules regarding continuing disability reviews (CDR). So, previously a CDR was essentially a de novo evaluation of the case. In other words, you start from scratch and try to reach a new decision or not. Congress said: Well, now, CDR, to terminate someone based on a disability review you must prove that they have recovered from whatever state they were in at the time they were given benefits. So, if they were given benefits by mistake, that's not sufficient. They have to have recovered from whatever that state was to lose benefits. It really raised the bar for the SSA to administer any awards it had made. Russ: And what year was that? Guest: This was done in 1984. Russ: So, presumably the number of people who are taken off the rolls now is a very small number. Guest: It is a very small number. Russ: Is that close to zero? Guest: Interestingly, there wasn't a big surge in disability awards after 1998, because the economy was doing great and growing very rapidly. So, the labor market was in great shape. It wasn't until the early 1990s, that first jobless recovery that you mentioned, that Disability started growing extremely rapidly and has not looked back since. Russ: And ratchets upward with each recession because people are on the rolls for a long time. Guest: It does. Russ: And they are still going to stay on the rolls. Do you have any measure of how often people voluntarily come off the rolls? Guest: Oh, it's tiny. It's less than 1%. Russ: That would be tiny. Guest: Per year. And even many of those, it turns out--it's a very small number. There are people who work, as you mentioned; but people tend to do what we call income targeting, which is that if they are working, they try to not exceed that substantial gainful activity level, because they, for understandable reasons, do not want to forfeit those benefits. Something like 10-15% of claimants appear to be doing some work-for-pay that is registered in the SS system. But they do it at a very modest level.
|Russ: So, how did the Americans with Disabilities Act (ADA) affect the program, and how does it, if at all? Guest: Well, that's an interesting question. And the notion of ADA is completely different. Russ: Which passed when? Guest: Different than the SSDI program. Russ: The ADA passed in 1991? Guest: The ADA passed in 1992 I believe; going to double-check that number. Um. Russ: It's after these liberalizations that we've talked about. But it's at the beginning of this set of mild recessions with mediocre job growth. Guest: So, it was passed in 1990. And as I mentioned, the definition of disability under the SSDI program is essentially the inability work. The disability program views work and disability as offsets. The ADA, in 1990, says, and I'm quoting now: "The nation's proper goals regarding individuals with disabilities are to ensure equality of opportunity, full participation, independent living, and economic self-sufficiency." Russ: Ironic. Guest: So the ADA says: Disability does not mean inability to work. It simply means impairments that may stand in the way of self-sufficiency; but our goal is to help you be self-sufficient. So, the irony is that the disability program essentially can't help you until you prove that you are incapable on your own. So, it essentially says: You want benefits? Well, prove it to me by don't being in the labor force. Don't be making a decent income. You have to prove it by making it clear you are deserving of help. And then we'll help you, but not if you start working again on any serious level, because then you are not disabled, and then you are not qualified. The ADA, on the other hand, says people with a work level should be given support to allow them to maintain economic self-sufficiency and enjoy the dignity and other benefits of work. Unfortunately, since the ADA was passed, the employment rate of the disabled has only gone down. [more to come, 38:23]