Disability Insurance: America's Secret Welfare Program, Pt. II

Earlier this week, I argued that Social Security's disability insurance had transformed over the past 30 years into a form of welfare for middle-aged, blue-collar Americans with withering job prospects. In the face of an ever-more hostile economy, unemployed coal miners and factory workers in states like West Virginia and Michigan -- people who are physically worn down, but probably capable of at least some work -- are deciding they're better off with a meager government check and health care than they are chancing it on the market. 

Not everybody agrees. Yes, the program's rolls have doubled since the early 1990's. And it's not that disabilities have become so much more common. But most of that growth, they argue, can be explained by population changes. Women entered the workforce in droves, and they now qualify for disability insurance as a result. The Baby Boomers are getting older and hence more disability prone. It's not an economic story, they say. It's a demographic story.

Fine argument, but this really, really is an economic story. And one of the clearest illustrations of why is contained in a graph recently presented by the Social Security Administration's chief actuary. It shows just how tightly the size of the disability rolls have been tied to the health of the job market, ever since reforms in 1984 made it easier to qualify for the program. 

Here's a quick tour: The red line is the U.S. unemployment rate. The blue line shows the number of workers awarded new disability benefits each year for every thousand who are eligible. But -- and here's the key -- it's adjusted to account for the demographic changes that have contributed to the program's growth. So what's it telling us? Ever since the early 90's, new disability awards have tended to rise and fall with overall joblessness. And, even accounting for the changing age and gender profile of the U.S. workforce, the overall award rate has risen by about half since the early 80's. 

Upshot: The problem isn't just that there are more people in the workforce who are likely to end up disabled. It's that a bigger fraction of them are applying for, and getting, benefits, especially when the economy sours. 

Here's another, simpler way of looking at the change, courtesy of Mathematica Policy Research. If men and women who were eligible for disability participated at the same rates they did in 1980, there would have been 2 million fewer former workers enrolled in the program by 2010 than there actually were. 

The good news is that while demographics haven't necessarily fueled the entire disability boom, they might help keep it in check. As the Baby Boomers age and begin to collect Social Security retirement checks, they'll be whisked out of the disability program. That's why the chief actuary projects that the program's relative cost should dip slightly and level out at around 0.8 percent of gross domestic product. 

The bad news, though, is that's still more expensive than we'll be able to afford. Right now, the disability trust fund is slated to go insolvent by 2016. In other words, there won't be enough money to pay out benefits at current levels, and people relying on the program will see their monthly checks shrink. It might be possible to avoid that plunge by tinkering with the with proportion of social security payroll taxes that flow into the program -- taking some from the retirement trust (which the baby boomers will need tomorrow) in order pay for disability benefits (which they'll need today). But obviously, that's not a workable long-term solution. That's why it's important to turn disability insurance into a program that helps more impaired Americans work, instead of paying them not to. 

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