Disability Model Isn’t Working

by John Hood

I’m glad to see news reporters and policy analysts devoting increasing attention to a subject Carolina Journal readers will find familiar: the role that public policy plays in discouraging work.

A key feature of the current, anemic economic “recovery” is that the share of adults who are active participants in the civilian workforce – whether employed or currently unemployed – is declining rapidly. If America had the same workforce-participation rate today as we had in January 2009, the national unemployment rate would be 11 percent – and higher than that in North Carolina. While some of the decline in participation had been explained by long-term demographic trends such as retiring Baby Boomers, there is clearly something else going on. It is evident, for example, among just the subset of workers aged 25 to 54.

Many people are starting to see rising rates of government dependency as one causal factor, particularly with regard to Social Security Disability Insurance (SSDI). Don’t take the word of this fiscal conservative for it. National Public Radio has been reporting on the phenomenon now for several weeks. Here’s an excerpt:

In the past three decades, the number of Americans who are on disability has skyrocketed. The rise has come even as medical advances have allowed many more people to remain on the job, and new laws have banned workplace discrimination against the disabled. Every month, 14 million people now get a disability check from the government. The federal government spends more money each year on cash payments for disabled former workers than it spends on food stamps and welfare combined.

A recent front-page story in The Wall Street Journal explored the issue from a different vantage point:

The unexpectedly large number of American workers who piled into the Social Security Administration's disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.

As I wrote back in December, there are good reasons to believe that the doubling of SSDI enrollment rates over the past two decides wasn’t the result of a true doubling of actual disability rates. There is a statistical relationship between both economic performance and unemployment insurance benefits on the one hand and applications for disability on the other, for example. People become more likely to file for disability when jobs become scarce and when their UI benefits run out. Neither of those events is likely to cause people to become disabled, however.

People choose to work when they expect the real, after-tax earnings from a prospective job to exceed the value of staying out of the workforce. What value can there be in not working? Quite a lot, actually. In addition to the enjoyment of leisure time, those outside the paid workforce might derive significant value from rearing children, caring for other relatives, running households (which produces non-wage income in the form of home production of goods and services), and obtaining education (which produces higher wage income in the future, at least in theory).

Government affects the decision to work on both sides of the equation. It can reduce real, after-tax earnings by inflating the currency or increasing taxes. And it can reduce the cost of not working by offering cash or in-kind benefits that people lose when they go to work. SSDI has a particularly pernicious effect here because studies show that once someone goes on government disability, the likelihood of ever rejoining the workforce goes way down. The same can’t be said for private disability insurance, which typically has strong programs and financial incentives to see recipients recovered, retrained, and returned to the job market if possible.

I wrote about these issues at some length in a 2004 report entitled From Entitlement to Investment: Rethinking U.S. Disability Policy for the 21st Century. Noting that the share of disabled Americans with jobs actually declined after the passage of the Americans with Disabilities Act, I argued the following:

Some of the most controversial issues of the day — from education funding and health care inflation to economic growth and the future solvency of Social Security and Medicare — reflect the costs imposed on all of us by a flawed model for disability policy that focuses on rights and redistribution rather than responsibilities and the creation of wealth. This “entitlement model” for serving the nation’s disabled has smuggled concepts and principles from the civil rights era into an arena where they are largely inapplicable. It also treats too many disabled Americans as hapless and dependent wards of the state rather than as productive citizens whose value as human capital often remains untapped.

In the interest of fiscal restraint and economic growth, North Carolina and the nation need to adopt a new model that focuses on bringing as many disabled people as possible into the workforce, which will improve both their incomes and their quality of life over time. The model also requires policymakers to focus public resources on those with severe physical or mental disabilities, while discouraging the abuse of SSDI as secondary safety net for those with mild (if any) disabilities who have exhausted their UI benefits.

You can’t make the economy healthier by paying a growing share of the population not to work.

John Hood is president of the John Locke Foundation and an NC Spin Panelist