The Rise of Disability

The share of working-age Americans receiving federal disability payments has roughly doubled in recent decades. It rose from 23 of every 1,000 workers in 1980 to 47 of every 1,000 workers in 2011. Put differently, 5 percent of the potential work force is more or less permanently out of action. That’s not good.

The government likes to describe the increase mostly as the result of two demographic trends. Americans, on average, are getting older, and old people are less healthy. Also, as more women have entered the labor force, the share of female workers with health problems has climbed closer to the male average.

Independent experts, however, see substantial evidence that disability insurance increasingly serves as a safety net for people who cannot find jobs - people, that is, who might still have the ability to perform at least some kinds of work.

A new research note from the Federal Reserve Bank of San Francisco estiates 40 percent to 60 percent of the growth in disability claims in recent decades is a result of the program’s attracting a broader constituency. They note that it has become easier to qualify, as claims increasingly are judged on subjective criteria. And the benefits have become more lucrative, particularly for low-wage workers. The formula is based on average wages, so rising income inequality has increased benefit payments even as the wages of most workers have stagnated.

The difference is important because disability insurance is a very sticky kind of safety net.  Historically, few people who qualify for disability during downturns return to the work force during rebounds, creating a twofold drag: Fewer workers and more people depending on each of those workers to pay their taxes.

The difference also is important because the disability progr! am is running out of money. The government projects that the disability fund will not be able to meet all claims in full by 2016. Those financial problems are relatively easy to fix if the growth of disability is being driven by demographics, because those trends are leveling off. But if the program is attracting a broader constituency, then demand for benefits could grow more rapidly, requiring larger changes.

As the San Francisco Fed note puts it, disability insurance “is likely to keep expanding unless program rules and incentives are fundamentally altered.”