The Federal Reserve Board and Social Security Disability

January 27, 2015

Dean Baker
Truthout, January 26, 2015

View article at original source.

The Republican Congress decided to make overhauling the Social Security disability program one of its first orders of business. On the first day of the new session it put in place a rule change that would make it difficult to address the shortfall the program is projected to face some time next year.

Republican leaders like Kentucky Senator Rand Paul justified this change by insisting that half the people getting disability had the sort of back aches and occasional anxieties that we all face. The difference is that they get checks from the government rather than working.  For this reason, Rand argued the program is in serious need of reform.

As several analysts quickly pointed out, there is no basis for Paul’s assertion. Only a relatively small fraction of disability beneficiaries remotely fit Paul’s description of people with backaches and anxiety. As the data clearly show, it is not easy to get disability. More than three quarters of applicants are initially turned down, and even after the appeals process just over 40 percent of applicants get benefits.

Furthermore, we know that the vast majority of people getting disability would not be working even if they weren’t getting a check from the government. A study published by the University of Michigan a few years ago examined the work patterns of people who were denied disability. It focused on a group of marginal applicants, people who had conditions that would be approved or denied depending in large part on the administrative judge to whom their case was assigned. These were the sort of people that Rand Paul was talking about.

This group comprised roughly a quarter of all applicants. The study found that among this group, 28 percent of the people who were denied benefits were working two years after their application. Since this was a marginal group comprising less than a quarter of applicants, we can infer that somewhere near 7 percent of the people approved would be working without their disability check.

Furthermore, even among this group the study found that average annual earnings were less than half their pre-disability level. This indicates that these people were suffering from a serious condition, even if didn’t make them completely unable to work.

But this 7 percent number gives a useful point of reference. We can set Rand Paul loose on the people with disability and have him throw off the ones that really could be working. If he has perfect judgment, then we will save the program 7 percent by getting rid of the people identified by the Michigan study. If his judgment is less than perfect, we may still save the same amount of money, but it could mean cutting off benefits for terminal cancer patients and other people with extremely serious health conditions.

This gets us to the Federal Reserve Board. If the problem is that we are spending too much money on disability then one sure way of reducing costs is to get the unemployment rate down. There is a regular pattern where more people go on disability when there is a downturn in the economy.  

This should not be surprising. There are many employers who keep older workers on the payroll even if a physical condition makes it difficult for them to perform their job. However when there is downturn and they have to cut back their workforce, these workers are likely to be the first to be laid off. In a labor force with a glut of unemployed workers, an older worker with a serious physical problem will find it difficult to get a new job. Therefore many of these people will end up getting disability.

The best way to keep these marginal cases off disability is to keep them on their jobs. Adjusting for the aging of the workforce, the number of people getting disability rose by more than 12 percent from before the recession in 2007 to 2011.

We can infer from this fact that if we had been able to hold the unemployment rate to its pre-recession level we would somewhere around 12 percent fewer people getting disability payments. That is considerably more than the number of would-be workers identified by the University of Michigan study. In other words, we are likely to do more to reduce disability roles by sustaining high levels of employment than by setting Rand Paul loose to get rid of all the shirkers.

This is yet another reason why all good people everywhere should be leaning on the Federal Reserve Board not to raise interest rates this year. The point of raising interest rates is to slow the economy and keep people from getting jobs. We all know many reasons why this is bad, but the disability whiners have given us one more.

If the Fed keeps people from getting jobs, then we will have more people getting disability benefits. If the number of people getting disability bothers you, send a note to Federal Reserve Board Chair Janet Yellen asking her not to raise rates.

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