Disability versus Work

June 21, 2012

The disability component of Social Security is growing faster than retirement benefits and requires substantive reforms.  Over the past three years, an additional 1 million Americans started receiving disability benefits, bringing the total number to 10.8 million. What is behind this surge, asks Pamela Villarreal, a senior fellow with the National Center for Policy Analysis.

Disability is the fastest-growing component of U.S. Social Security:

  • Between 2008 and 2011, disability expenditures increased 22 percent to $132 billion, compared to 19 percent for Social Security retirement benefits.
  • By 2016, disability expenditures are expected to increase an additional 30 percent to $170 billion, and payroll taxes that fund disability under current law will cover only 79 percent of projected benefits.

The Social Security Administration reports that less than one-half of 1 percent of disabled individuals return to work.  However, a longitudinal study from the Center for Studying Disability Policy found that up to 2.8 percent of beneficiaries return to work within 10 years of receiving benefits.  Either way, the likelihood of returning to work is small, even though the health status of many disability recipients improves over time.

There are considerable disincentives for individuals on disability to return to work.  Consider:

  • Lack of accountability in the system allows beneficiaries who could eventually return to work to continue receiving payments.
  • Recipients who are able to supplement their disability payments with part-time income are discouraged from doing so out of fear of losing their disability benefits.
  • Finally, disability status under Social Security makes recipients eligible for various other benefits as well, such as Medicaid, food stamps, Section 8 housing and student loan forgiveness.

Long-term unemployment and the receipt of extended unemployment benefits increase the likelihood that an individual will never return to the workforce.  It appears that, increasingly, older workers permanently exit the labor force for early retirement and disability pensions.

The current Social Security disability system is fraught with poor incentives, high costs and an unsustainable future.  Prefunded personal disability accounts, as an integral part of overall entitlement reform, would reduce costs and promote a more efficient system that encourages individuals to work to the extent they are able.

Source: Pamela Villarreal, "Disability versus Work," National Center for Policy Analysis, June 19, 2012.

For text:

http://www.ncpa.org/pub/ib109

 

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