Time to do something about Social Security disability program

Problems associated with Social Security are often viewed as long-term because of the substantial accumulated balance in the combined Social Security trust funds (Old Age and Survivor’s Insurance or OASI; Disability Insurance or DI). Never mind that there is no money or other assets in these trust funds, only accounting entries based on previous excesses in the amount of dedicated tax revenues for Social Security programs that were spent for other purposes.

Both OASI and DI are now paying out more than their dedicated tax revenues (excluding imputed interest income, which is no more real than the trust fund balances), and they will constitute a growing drain on the government’s fiscal resources. Here’s a recap for calendar year 2013 based on the most recently published (
2014, download PDF) report of the Social Security trustees.

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The OASI deficit will grow far larger in coming years as the ratio of active workers to retirees shrinks. Given the apparently healthy OASI trust fund balance, the failure of previous reform proposals, and the present balance of power in Washington, however, there is no realistic chance of changes to OASI in this session of Congress. An update on the Social Security shortfall, 8/18/14.

On the other hand, the DI trust fund is growing low. It will probably be exhausted in 2016, barring corrective action by then, after which it would be necessary (under current law) to either cut the disability payments of some 11 million recipients by about 19% or enact a tax increase.

None of the nation’s political leaders would want to be blamed for either result, so some sort of action will be taken in this session of Congress. Discussion follows as to how the DI problem developed, options that are available, and some tips for conservatives on how to make their case.

I. How DI problem developed - The Social Security disability program has expanded in recent years; 8.9M disabled workers (plus 1.9M children and 0.2M spouses) were receiving benefits by the end of 2013 versus about 4.4M disabled workers at the start of 1997. 2013 closes with record number on disability getting highest-ever monthly benefits, Terrence Jeffrey, cnsnews.com, 12/31/13.

A chart follows showing the aggregate growth in DI cost. Because additional costs are involved under two other programs, the true cost of classifying claimants as disabled is about double the numbers that are shown.

•DI beneficiaries qualify for early Medicare coverage, which is currently costing the government an additional $100B plus per year. The rising cost of Social Security Disability Insurance, Tad DeHaven, Cato Institute,
8/6/13.

•On reaching retirement age, DI beneficiaries transition to retirement benefits. Extra cost is involved, however, because retirees classified as disabled or low income receive an extra Supplemental Security Income (SSI) stipend. The total cost of the SSI program is currently running about $60B per year. Social Security Administration, downsizinggovernment.com (Cato),
8/6/13.

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Between 1996 and 2013, the doubling of disabled workers compares to 17% population growth (
source). This suggests that non-demographic factors were primarily responsible for the observed DI growth. Here are other potential reasons, which as will be seen tend to be overlapping

•During economic downturns, pressure builds for government programs to help workers who have lost their jobs. Thus, extended (up to 99 weeks) unemployment benefits were provided for several years after the 2008-09 recession; they arguably slowed the recovery by reducing the incentive of unemployed workers to find new jobs. As the extended unemployment benefits eventually expired, or earlier in the case of so-called “double dippers,” many unemployed workers applied for DI benefits that were envisioned as a long-term substitute. Jobless disability claims soared to record $200B [probably DI + SSI] as of January, Janet Whitman, New York Post,
2/19/12.

With their unemployment-insurance checks running out, some of the country’s long-term jobless are scrambling to fill the gap by filing claims for mental illness and other disabilities with Social Security — a surge that hobbles taxpayers and [makes] the employment rate look healthier than it should as these people drop out of the job statistics.

•Disability benefits can be very attractive to marginal workers, adding up to hundreds of thousands of dollars over time. Some people exaggerate supposedly disabling conditions to qualify for them. The Social Security disability con, Washington Times,
3/31/14.

. . . more than half of the new Social Security disability claims are based on mental or musculoskeletal disorders. Such claims are easy to fake, difficult to diagnose and hard to disprove, creating an easy opening for shysters, schemers and other evildoers.

•Attorneys are eager to represent disability claimants, typically on a contingent fee basis. Surge in disability claims is gold mine for law firms, Todd DeHaven, Townhall.com,
8/26/13.

An applicant whose appeal is successful is awarded payments dating back to the onset of the disability. The lawyer typically receives 25 percent or up to $6,000 of this “back pay.” While that amount may not be enticing to general law firms, firms specializing in disability claims can make millions of dollars based on a high volume of cases and knowing how to work the system. According to Social Security Administration data obtained by the Wall Street Journal, fees paid to lawyers and other representatives of disability applicants went from $425 million in 2001 to $1.4 billion in 2011.

•In some cases, overly aggressive attorneys have been aided and abetted by dishonest administrative law judges and/or doctors vouching for alleged disabilities – creating what has been described as the “disability-industrial complex.” Senate committee hearing on disability fraud, Tad DeHaven, Cato Institute,
10/8/13.

Yesterday, the Senate Committee on Homeland Security & Governmental Affairs ([Tom] Coburn is the ranking member) held a hearing on a particularly egregious example centered on the Social Security Administration’s Huntington, WV office. The case is a perfect example of what is quickly becoming known as the “disability-industrial complex”: specialty law firms overwhelming the system with dubious disability claims, doctors vouching for applicants with dubious claims, and federal administrative law judges awarding disability benefits to individuals with dubious claims.

•Some scandals have involved claimants who might have been expected to set a better example. Former New York City workers charged in disability scam, Associated Press, Washington Examiner,
1/7/14.

Scores of retired New York City police officers, firefighters and prison guards were charged Tuesday with faking psychiatric problems to get federal disability benefits -- with some falsely claiming their conditions arose after the Sept. 11 attacks, prosecutors said. Four ringleaders coached the former workers on how to falsely describe symptoms of depression and other mental health problems that allowed them to get payouts high as $500,000, said Manhattan District Attorney Cyrus R. Vance Jr. The ringleaders made tens of thousands in dollars in secret kickbacks, Vance said. Among the retirees arrested were 72 city police officers, eight firefighters, five corrections officers and one Nassau County Police Department officer.

•With multiple stages in the application and appeal process, marginal claimants are likely to prevail in the end. Administrative law judges have found that there aren’t many complaints when they say “yes,” but every point for rejection must be justified if they say “no.” Wading through disability paperwork, Nicole Kaeding, Cato Institute,
10/23/14.

•Here’s an example of the bias in favor of DI awards. Delaware legislators push for deep look at [DI] denials, News Journal,
3/1/12.

The News Journal has reported on the Dover office’s stinginess before, and now Senator Tom Carper, Senator Chris Coons, and Representative John Carney have all asked the SSA Commissioner to order an investigation. The implication is that claims of disability are being improperly denied, e.g., Rep. Carney said “the wide disparity of approval rates among the judges justifies a more thorough analysis of whether every claim is getting fair consideration.” And Senator Coons reported receiving more complaints about the Dover judges during his first year in office than about any other issue, including the federal budget and the war in Afghanistan.

•DI benefits are subject to reconsideration based on new information or changing circumstances, but the government has had limited success along these lines. Social Security’s outdated records systems invite disability fraud, IG report, Stephen Dinan, Washington Times,
9/14/14.

•The natural tendency for DI recipients is to refrain from efforts to overcome disabilities and reenter the workforce. Why risk losing their benefits, and possibly even be sued for the recovery of previously paid amounts, by finding a job that will pay more than the government-set limit on supplementary earnings. Social Security’s futile attempt to help disabled people go back to work, Joseph Lawler, Washington Examiner,
8/15/14.

Summing up, explosive growth in DI benefits has been basically driven by the lure of “free money.” In addition to being a fiscal drain, the program has had unfortunate effects for recipients who were encouraged to claim that they were disabled and thereby became trapped in long-term dependency. Would this country be better off if the federal DI program had never been established? However one answers that question, reforms to improve the current situation should certainly be considered.

II. Options – Here are some approaches to the DI problem that have been suggested.

#Bailout - The quickest and easiest way to stave off exhaustion of the DI trust fund in 2016 would be to transfer funds from the supposedly solvent OASI program. Change the respective percentages of payroll tax revenues – problem solved. And that’s precisely what the Social Security trustees recommended in their 2014 report (download PDF), albeit judiciously noting that “such a response might serve to delay” needed Social Security reforms.

Lawmakers may consider responding to the impending DI Trust Fund reserve depletion as they did in 1994, solely by reallocating the payroll tax rate between OASI and DI. Such a response might serve to delay DI reforms and much needed corrections for OASDI as a whole. However, enactment of a more permanent solution could include a tax reallocation in the short-run.

Early in the current session of Congress, House Republicans adopted a procedural rule that would make it more difficult to pull off a bailout of the DI trust fund. The House just made it harder to politicians to steal from Social Security retirement fund, Romina Boccia, dailysignal.com,
1/7/15.

Page 32 of H. Res. 5 adds a point of order against weakening either trust fund, unless the changes result in an overall improvement to Social Security’s combined trust funds.

When push comes to shove, however, this firewall may not do much good. First, the amount of overall improvement is not specified, so a nominal adjustment would suffice. Second, the quid pro quo principle may be circumvented by promising future reforms. Thus, the president’s budget proposal calls for a trust fund bailout now, with limited DI reforms (more about them in a minute) to begin next year. A recurring theme in the president’s budget,
2/16/15.

Left-leaning members of Congress have shown even less zeal for tackling the DI mess, apparently preferring to blame Republicans for bringing up the issue at all.

•Senator Elizabeth Warren (D-MA): Republicans are “inventing a Social Security crisis that will threaten benefits for millions and put our most vulnerable at risk.” Disabling a budget con, Wall Street Journal, 1/15/15.

•Senator Bernie Sanders (I-VT): The debate is “nothing more than a manufactured crisis which is part of a long-term Republican agenda of trying to cut Social Security.” Social Security fix off to acrimonious start, Joseph Lawler, Washington Examiner,
2/11/15.

•Senator Harry Reid (D-NV): “Americans are no strangers to crises manufactured by Republicans in Congress. We were not even a month into this new Congress before the new Chairman of the House Budget Committee sounded a false alarm over the program and suggested cutting benefits. This is yet another GOP sneak attack to undermine Social Security and break our promise to those who have worked hard and contributed in good faith.” Press release,
2/11/15.

#Beefed-up enforcement – Starting in 2017, the administration has proposed to “establish a dependable source of mandatory funding for Continuing Disability Reviews (CDRs) and Supplemental Security Income Redeterminations, which ensure that only those eligible for benefits continue to receive them. [The Social Security Administration] estimates that each $1 spent on CDRs would save the Federal Government $9. This proposal, coupled with discretionary funding proposed for 2016, could produce net savings of $32 billion over 10 years and reduce the current backlog of 906,000 overdue CDRs.”
Fiscal Year 2016 Budget of the U.S. Government (download PDF), pages 42-43.

Comment: Egregious examples of DI fraud have been reported (as previously discussed) so these ideas merit consideration, but we aren’t truly enthusiastic. (1) Moving programs to mandatory funding invades the budget prerogatives of Congress. (2) The 9:1 payoff ratio probably underestimates the ability of fraudsters to change their tactics and/or ignores the law of diminishing returns. (3) A 10-year savings of $32 billion over 10 years pales in comparison to the overall costs of classifying Social Security participants as disabled (currently some $300B a year if SSI and early Medicare are factored in).

#Programs to keep marginal workers employed – Most of the people who have been classified as disabled will remain on DI, but it may be possible to limit the number of new approvals. To this end, the administration has proposed (BP page 42) to test “innovative strategies to help people with disabilities remain in the workforce. Candidates include “supportive employment services for individuals with mental impairments, targeted incentives for employers to help workers with disabilities remain on the job, and opportunities for States to better coordinate services [whatever that means].”

The administration also proposes to hire more administrative law judges, thereby reducing the wait times for DI decisions (expected to rise above 16 months in 2015).

A former Social Security official (now with the American Enterprise Institute) suggests trial programs are too slow. Other countries have faced excessive disability problems and shown that major improvement is possible, why not learn from their success? Averting the disability-insurance meltdown, Andrew Biggs, Wall Street Journal,
2/23/15.

. . . the Netherlands—once a disability basket-case—reduced the inflow of disability beneficiaries by 60% in six years. The Netherlands lowered taxes for employers who can keep the disabled on the job. The Dutch reforms also required that all workers considering applying for disability first construct a rehabilitation plan with their employer and be able to show that they have followed through on it. The US should explore similar options. The country can’t afford to paper over the need for reform once again.

Comment: Of the two approaches, the Biggs approach sounds more promising. It’s not exactly a free market solution, however, and one of the unintended results might be increasing rigidity in labor markets as employers strove to retain marginal workers in an effort to stay comply with government-approved disability quotas.

#Restrict DI eligibility – The criteria for disability determinations have been liberalized over time, e.g., in 1984 by allowing greater weight on mental health issues. Many people now being approved for DI benefits are capable of holding a job.

Moreover, the DI criteria have not been adjusted for (a) changes in work requirements (less physical labor is required nowadays), or (b) improved technology (contact lenses, hearing aids, prosthetic limbs, pharmaceuticals, etc.) to help overcome physical and/or mental impairments.

It has therefore been suggested that the DI eligibility criteria should be modernized with the goal of weeding out applications dependent on non-medical factors. Thus, the “medical-vocational grid” would be replaced with “a simpler, fairer and more uniform system.” Modernizing the SSDI eligibility criteria, Mark Warshawsky & Ross Marchand, Mercatus Center,
4/28/15 (download PDF).

. . . the “medical-vocational grid” reflects a view of the labor market and disability that is out of date with the economy and modern medicine. The grid’s guidelines make it easier to award SSDI benefits to middle-aged and older workers, unskilled workers, and non-English-speakers, and should be eliminated and replaced with a simpler, fairer, and more uniform system for determining eligibility. The same process applied to people under age 45 should also be applied to those above age 45.

Comment: This approach should address the notorious lack of consistency in DI determinations and also help to reduce the DI application backlog without hiring more administrative law judges. Agreeing on the replacement for the “medical-vocational grid” might be difficult, however, given numerous players (remember the “disability-industrial complex") with an interest in maintaining the status quo.

#Change the premise of the DI program – DI benefits are currently seen as a wage substitute, which should be taken away if the beneficiary has earnings at or above a “substantial gainful activity” (SGA) level. Beneficiaries are therefore encouraged to either not work too much or be paid under the table.

Imagine that the beneficiary was paid a bonus on a sliding scale – the generalized benefit offset (GBO) – for the work he or she was able to do. Then there would be an incentive to work as much as possible, with no penalty for those truly unable to work. SSDI reform: Promoting gainful employment while preserving economic security, Jagadesh Gokhale, Cato Institute,
10/22/14 (download PDF).

Thinking along somewhat similar lines, the Association of Mature American Citizens (AMAC) suggests three categories of disability – two of which would involve work incentives. How conservative seniors want to reform Social Security, Jason Russell, Washington Examiner,
5/28/15.

AMAC says the system should have three categories of disabilities, each with different durations and benefits: temporary but total disability (recipient is completely unable to work but will eventually recover), partial and permanent disability (recipient is unable to keep working his current job but could be retrained for another), and total and permanent disability (recipient is permanently unable to work in any job).

Comment: The Cato proposal sounds awfully complicated, and AMAC’s approach would spawn endless discussions as to which of the three disability categories applied in specific cases. We think it would be more practical to reform the existing system than to put something entirely different in its place.

III. Tips for conservatives – Conservatives have been ripped by their political opponents, as has been discussed, for heartlessly suggesting that constructive changes to the DI program should be considered before bailing out the DI trust fund.

That’s how liberals typically react to questions about the ever-expanding welfare state, and with good reason. Not only does the “heartless” charge register with the general public, but conservatives haven’t found an effective response. The case against liberal compassion, William Voegeli, Imprimis,
October 2014.

Small-d democratic politics is Darwinian: Arguments and rhetoric that work—that impress voters and intimidate opponents—are used again and again. Those that prove ineffective are discarded. If conservatives had ever come up with a devastating, or even effective rebuttal to the accusation that they are heartless and mean-spirited: a) anyone could recite it by now; and, b) more importantly, liberals would have long ago stopped using rhetoric about liberal kindness versus conservative cruelty, for fear that the political risks of such language far outweighed any potential benefits.

We can’t claim to have found an antidote to such attacks, but the exposure to them suggests a sober and cautious approach in the DI battle. Put the other side on the defensive by dwelling on examples of fraud and presenting charts showing the cost increases, propose step-by-step reforms instead of sweeping changes, and above all don’t surrender tactical advantages like the pending exhaustion of the DI trust fund without extracting concessions to adequately compensate therefor.


* * * FEEDBACK * * *

I liked the write-up on DI. I've been very suspicious of this program as it is relatively easy to defraud. You confirmed my suspicions. I think the law firms who specialize in this field are largely to blame - and their cases should be followed up on. – SAFE director

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