The Attack on Social Security and Disability: Profiting From Mistakes

April 05, 2013

Dean Baker
The Exchange (Yahoo! Finance), April 4, 2013

See article on original website

The latest hot topic of debate in Washington is the rising cost of the Social Security disability program, which provides insurance for workers who are unable to work due to health conditions. According to several major news stories, the cost of the program is out of control, with large numbers of people opting to take a benefit that averages $1,100 a month rather than working for a living. Following off these pieces, many in the Washington elite are now on the warpath, anxious to stop these freeloaders from taking the taxpayers’ money.

While the story of freeloading run amok may have lots of appeal to the Washington elite, it happens not to fit the facts. The cost of the disability program has been rising, but the explanation is even simpler than bad morals: We’re getting older.

Workers are more likely to be disabled in their 50s or 60s than in their 20s or 30s. With the huge baby boom cohorts now occupying these prime disability ages, it should not be surprising that the cost of the disability program would rise. In fact it had been predicted for decades.

Rather than costs exceeding projections, they were actually running somewhat lower than had been projected in the mid-90s. That is, they were running lower until 2008.

A simple explanation

Since 2008, the cost of the disability program increased by one-third relative to the payroll base. This leaves two options. We can believe that America’s workers suddenly become lazy deadbeats or we can think that the collapse of the economy gave millions of workers no choice but to turn to disability insurance.

Disability claims are related to the state of the economy because there are many people who work in spite of being partially disabled. Take the case of a warehouse worker with a bad back, who cannot lift as much as younger co-workers.

When the economy is strong and the unemployment rate is low, an employer may be willing to keep a reliable worker on the payroll even if a disability means that the worker is not operating at 100 percent. However when the economy weakens and the employer makes layoffs or goes out of business, workers with disabilities are more likely to find themselves unemployed.

Even with the modest recovery we have seen to date, there are still more than 3.5 unemployed workers for every job opening. This is not a good environment for a worker with a disability seeking a new job. This is why many more workers turn to disability insurance in a weak economy.

Anyone who thinks disability insurance is an easy meal ticket has not looked at the data. Only a bit over 40 percent of claims are approved. And more than one-third of the approved claims have to go through an appeals process after initially being rejected. This appeals process can take several years. Many applicants die before their claim is resolved. But hey, the Washington elite want to crack down on disability.

This is bigger than disability insurance

The really infuriating part of this story is that no one is talking about the downturn that created the high disability rates in the first place. Just to remind readers, we have high unemployment because the Fed let a huge housing bubble grow unchecked. When it crashed we lost more than $1 trillion in annual private sector demand, as the construction and consumption demand that were driven by the bubble disappeared.

It is this gap in demand that needs to be filled. The only way to fill the gap in the short-term is through government deficits. That has nothing to do with whether we like the government or private sector, it just happens to be the reality.

The private sector does not create demand just because we want it to. There are no plausible stories whereby private investment or consumption will rise enough to fill the gap created by the collapse of the housing bubble. In the longer term we can hope that net exports can fill the gap, but this will take time and require a larger drop in the value of the dollar than we have yet seen.

Unfortunately, no one in the Washington elite is talking about policies to get us back to full employment. Instead they are trying to create a panic over the budget deficit that resulted from the collapse of the housing bubble, which is now an essential support for the economy. And disability insurance now holds center place in their sights, because hey, if you’re rich enough to matter, you don’t need it.

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