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U.S. disability programs provide valuable benefits to low-income recipients across a range of health conditions

Summary:
The three components of the U.S. social insurance system serve retirees and those recipients facing challenging health conditions. But all three programs have grown in recent decades, sparking various calls for reform. The basic Social Security retirement system is now more than 80 years old, while the Social Security Disability Income system turned 65 in August and the Supplemental Security Income program, the youngster of U.S. retirement benefits system, celebrated its 47th birthday back in January of this year. Basic Social Security remains a wildly popular retirement benefit and is thus considered an untouchable “third rail” in U.S. politics. But calls to reform Social Security’s two younger siblings often get caught in political crossfires because of concerns about

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The three components of the U.S. social insurance system serve retirees and those recipients facing challenging health conditions. But all three programs have grown in recent decades, sparking various calls for reform. The basic Social Security retirement system is now more than 80 years old, while the Social Security Disability Income system turned 65 in August and the Supplemental Security Income program, the youngster of U.S. retirement benefits system, celebrated its 47th birthday back in January of this year.

Basic Social Security remains a wildly popular retirement benefit and is thus considered an untouchable “third rail” in U.S. politics. But calls to reform Social Security’s two younger siblings often get caught in political crossfires because of concerns about individuals who may not have severe health conditions receiving SSDI and SSI benefits.

These two programs together provide access to health insurance and $200 billion annually in cash benefits to nearly 13 million Americans. At the same time, criticism of who qualifies for Social Security Disability Income and Supplemental Security Income has become more common in the United States. The argument goes that only those who suffer from the most severe health problems deserve access to these benefits. And the expansion of these two programs in recent decades has been attributed, at least in part, to nonhealth factors, such as stagnating wages, resulting in concern that providing benefits to individuals without severe health conditions is diluting the value of these programs overall.

The findings in a recent working paper by me and my co-author Lee M. Lockwood at the University of Virginia address the premise of this argument. Our data-driven analysis of Social Security Disability Insurance and Supplemental Security Income finds that the value of these two programs, including value from insuring nonhealth risks, exceeds that of cost-equivalent of tax cuts by 64 percent, creating a surplus worth $8,700 of government revenue per recipient per year.

Moreover, we find that the high value of the SSDI and SSI programs is, in part, because of—not despite—mismatches with respect to health status. We estimate that benefits to recipients with less-severe conditions create a value over cost-equivalent tax cuts of $7,700 per recipient per year, or about three-fourths that of benefits to those recipients with more-severe conditions of $9,900.

These are important findings amid the debate about SSDI and SSI benefits for less-severe recipients. Benefits to less-severe recipients do not decrease the value of the two programs. Instead, they increase it considerably, accounting for about half of the total value. We discuss the policy implications of our findings in this column after briefly presenting the outlines of our research.

The outlines of our research

We conducted our research using a combination of survey and administrative data to establish new facts about the targeting of disability benefits on the basis of nonhealth factors. Our working paper details the complete methodology, but, broadly, our research examined disability recipients and nonrecipients with different health statuses. We find that less-severe disability recipients are, on average, much worse off economically than less-severe nonrecipients and, by many nonhealth measures, are even worse off than more-severe recipients.

We find in administrative data, for example, that prior to receiving disability benefits, less-severe recipients are 40 percent more likely to have experienced a mass layoff, 19 percent more likely to have experienced a foreclosure, and 23 percent more likely to have experienced an eviction than more-severe recipients. And from survey data, we find that less-severe recipients have similarly low consumption levels to more-severe recipients just prior to receiving disability benefits. Conversely, more-severe nonrecipients are, on average, better off than either more-severe or less-severe recipients.

The strong associations between receiving disability insurance payments and nonhealth shocks conditional on recipients’ overall health increases the value of Social Security Disability Insurance and Supplemental Security Income by both increasing insurance of nonhealth risk and decreasing distortion costs from discouraging work. Providing disability benefits, for example, to a worker who is laid off and has limited earnings prospects but not a severe health condition can increase the value of the disability program through both high insurance value and low distortion of earnings.

Our findings help reconcile two strands of the debate over these disability programs. The first strand raises concerns about disability programs, including that some disability recipients may not have severe health conditions, that labor market shocks increase disability enrollment, and that disability programs overall reduce the labor supply of marginal recipients. The second strand quantifies the so called welfare effects of various reforms to the SSDI and SSI programs, taking into account the gains, less any losses of these programs. This strand typically finds that expanding disability programs would increase the welfare of recipients.

Our results help reconcile the tension between these two strands by demonstrating that the nonhealth drivers of enrollment in the two programs do not just drive up the costs of the programs, but also drive up the benefits in terms of insuring nonhealth risk.

Policy implications

The public debate over Social Security Disability Insurance and Supplemental Security Income centers on concerns about individuals with less-severe health conditions receiving benefits. But we find that these programs are highly valuable and that including benefits to individuals with less-severe health conditions actually increases their value. Together, our findings show that these programs target well on the key determinants of the value of receiving disability benefits.

Our results suggest that proposed reforms to decrease benefit levels, allowance rates, or awards to individuals with less-severe health conditions would harm recipients without improving the two programs. A related but distinct question that our paper is not equipped to answer is whether these two programs should be expanded.

Another relevant question is whether disability programs are the best way to insure nonhealth risk. For individuals with high earnings capacity, insuring them through other means—perhaps by expanding Unemployment Insurance or creating a new wage insurance program—could be valuable. But the available evidence suggests that the vast majority of disability recipients, including those with less-severe health conditions, would earn little even if not receiving disability benefits.

Moreover, expansions of alternative programs would have efficiency costs of their own and may lack the advantageous targeting properties that we find for Social Security Disability Insurance and Supplemental Security Income.

U.S. disability programs provide valuable benefits  to low-income recipients across a range of health  conditions Boosting Wages
U.S. disability programs provide valuable benefits  to low-income recipients across a range of health  conditions Equitable Recovery

Conclusion

Of course, the importance of nonhealth risk for the value of U.S. disability programs may be just one example of a broader phenomenon. No program exists in a vacuum—its effects reflect the diversity of risks in the U.S. economy, how well-insured those risks are by other programs and institutions, and how its tags and screens select on those risks.

Still, we find that Social Security Disability Insurance and Supplemental Security Income insure risks well beyond health, and that this “incidental” role is central to their overall value. Other programs might be similar in having their costs and benefits driven in large part by factors outside of their core aims. The extent to which they do is an empirical question, one that future research could investigate using similar methods.

Manasi Deshpande is an assistant professor of economics at the University of Chicago, faculty research fellow at the National Bureau of Economic Research, visiting economist at the Social Security Administration, and a 2016 Equitable Growth grantee. Her co-author on the working paper featured in this column, Lee. M. Lockwood, is an associate professor of economics at the University of Virginia.

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