More on Disability: New Welfare or New Unemployment Insurance?

Some commenters have challenged our post on the increasing number of people on disability insurance, making the following claims:

1. The real cause of the increase in disability is a poor economy . . . and

2. That it’s substantially due to the declining health of the population, and particularly due to the fact that an aging population resulted in more Americans in the age range (50-64) where health problems are prevalent.

An authoritative discussion of the increasing disability rolls comes from MIT economist David H. Autor.

There is some validity to the claim that a poor economy leads to more people on disability. Quoting Autor:

The growth of the SSDI rolls is not solely due to changes in the program’s eligibility criteria, however. The labor market has played a key contributing role. Previous research has established that workers are most likely to apply for SSDI benefits following job loss, a fact underscored by the pronounced positive correlation between the national unemployment rate and the SSDI application rate. The secular decline in earnings and employment opportunities for U.S. workers with high school or lower education over the last three decades has also made SSDI an increasingly attractive option for job losers and long-term unemployed.

However, as with everything else associated with the welfare state, when you reward dependency, you will get more dependent people:

As highlighted by Autor and Duggan (2003), the effective replacement rate of labor earnings with SSDI benefits has also risen in recent decades due both to the rising value of in-kind Medicare benefits and to a subtle interaction between the SSDI benefits formula and rising income inequality in the U.S. This interaction causes SSDI’s effective generosity for low-wage workers to rise as wages in the lower deciles of the distribution fall relative to the mean. Hence, absent any changes in the SSDI program, it is a near certainty that the deteriorating U.S. labor market for less educated workers would have caused SSDI applications to rise in recent decades. The Congressional liberalizations of the program enacted in 1984, however, allowed this surge in demand for benefits to translate into a substantial growth in the SSDI rolls.

As for the argument that people are becoming less healthy, that seems to be without much merit:

2.2 The role of population health and aging

The expanding size and cost of the SSDI program would not be inherently problematic if this expansion reflected a rising rate of disability among working-age adults and, moreover, if the program’s mounting expenditures enabled these individuals to maintain employment and self-sufficiency. Neither appears to be the case. Figure 6 shows that the fraction of middle-age adults reporting a disability has been roughly stable over the last two decades, averaging approximately 10 percent among both men and women.

Moreover, there is little evidence that the underlying health of the working-age population in the U.S. is deteriorating. For example, one of the most common and rapidly expanding diagnoses for individuals receiving SSDI awards is mental illness, which comprised more than 20 percent of SSDI awards in over the past decade. A recent study in the New England Journal of Medicine (Kessler et al. 2005) reports that the prevalence of mental disorders in the U.S. population was unchanged between 1990 and 2003. In the same interval, the rate of treatment of mental illness substantially increased—which in turn should have contributed to improved work-readiness among individuals coping with mental illness.

Using self-reported health data from the National Health Interview Survey, Duggan and Imberman (2008) find a substantial improvement between 1984 and 2004 in the average health of U.S. adults between the ages of 50 and 64. This age group is especially relevant because it accounted for 62 percent of all SSDI recipients in 2004. Reinforcing these conclusions, demographers Kenneth Manton and XiLiang Gu of Duke University (2001) find that the share of the population ages 65 and older suffering from a chronic disability fell by one-third between 1982 and 1999 (from 26.2 to 19.7 percent), with the largest drop between 1994 and 1999. In net, there is little reason to believe that the work capacity of adults with disabilities has declined in recent decades.

Perhaps surprisingly, the aging of the U.S. population—in particular, the passing of the baby boom generation into middle age—has made only a modest contribution so far to the growth of Disability Insurance. Calculations from Duggan and Imberman (2008) reveal that, holding age- specific rates of receipt of disability benefits at their 1984 base, the aging of the population between 1984 and 2004 explains only 6 percent of the increase in the fraction of non-elderly adults receiving Disability Insurance through 2004. The contribution of aging to program growth is numerically overwhelmed by the growth of SSDI recipients within given age groups.

The bottom line here is not that having a social safety net is a bad idea. It’s that it’s a good idea with huge dangers attached. The welfare state tends to take on a momentum of its own, with ever increasing dependency. But simply having people dependent on government is not nearly so bad as an ethos of dependency, in which people come to think that, as a matter of right, they have a claim on a decent lifestyle, regardless of work or effort. Europe is far down that path, and we see the results.

We seem to be following, pushed along by elites who benefit from change.

The table below (from Autor) tells the story.