Sunday, December 12, 2010

Disability Insurance - Making a Cure That's Worse Than The Disease

I've seen a few critical comments on Peter Orszag's New York Times column, in which he argues for the privatization of SSDI (at least over the first two years). But it nonetheless astounds me how many half-baked ideas Orszag can cram into a few paragraphs of text.

Apparently somebody told Orszag that The Netherlands has implemented a program of private insurance for disabled workers and he has decided from anecdote that a similar solution in the United States would vastly reduce the number of workers who are determined to be disabled. Except he falters even as he tries to get out of the starting blocks:
Unfortunately, at this point more than six million people have been unemployed for six months or longer. More than one million have already given up looking for work because they believe no job is available. And a drastic rise in applications for disability insurance suggests we may be headed for more long-lasting trouble....

The spike in disability insurance applications (and awards) does not reflect a less healthy population. The fraction of working-age adults who report a disability, about one in 10, has remained roughly constant for the past 20 years. (Indeed, it would be surprising if the number of workers with disabilities had risen by 50 percent over the past four years.) Rather, the weak labor market has driven more people to apply for disability benefits that they qualify for but wouldn’t need if they could find work.
Orszag's proposed solution is that
that employers should be required to offer their workers private disability insurance. Such coverage would provide people who have a work-limiting disability with vocational assistance, workplace accommodation and limited wage replacement.
Let's stop and think about this for a moment: The problem is that chronically unemployed people, seeing their unemployment benefits about to run out, apply for Social Security disability benefits. They don't necessarily get Social Security - there's no reason to believe that the SSA has lowered its threshold for reviewing and approving (or should I say rejecting) applications. But they're applying. So already there are two glaring defects to Orszag's approach. First, unless we're also going to assume that an ex-employer will be compelled to provide disability insurance for two years after the employee is fired or laid off, and that the employer will continue to exist throughout that period and won't discharge its obligations in bankruptcy such that it can pay premiums, the workers Orszag identifies as being responsible for the spike in disability applications still won't have private disability insurance. Second, there is no reason to believe that these very same people in the exact same circumstance wouldn't apply for private disability insurance.

How does Orszag imagine that his system would save money?
Private employers would have an incentive to prevent their workers from having to file disability applications, because their insurance premiums would rise in response to higher disability rates.
As Walmart demonstrated, there's more than one way to skin that cat - you change job duties and descriptions such that people whose physical health is at all impaired aren't likely to apply or, if problems develop later, are likely to quit. Without diminishing how mental illness can result in disability, his proposal seems most likely to burden employers that depend upon physical labor - the heightened risk of physical injury will drive up their insurance cost.

Last I checked, a lot of public and private entities that largely hire white collar workers for desk jobs already offer disability insurance as a supplement to SSDI - that is, it's easier to quality for benefits which are often more generous than Social Security's payments. The burden of this type of law isn't likely to be a burden on those employers. But it is likely to be a burden on the employers who would otherwise be hiring the very body of workers Orszag accuses of gaming the disability system. In short, he would be creating a huge disincentive for employers to hire older and displaced workers for jobs with a physical component, or to find ways to terminate their employment before they're able to claim disability against the company's insurance policy.

Orszag argues that the average "human resource" cost of his proposal would be "roughly $250 per worker per year". That appears to be the administration cost, as it's difficult to believe that any sort of viable long-term disability insurance coverage could be purchased for that price (let alone the cost of a policy and the cost of administration). From what I've read, workers can expect long-term disability insurance to cost between 1% and 3% of their salaries to cover about 60% of wages during a period of disability, with the cost increasing with age. Orszag's number appears inadequate to cover the cost of a low-end policy for somebody making $30,000 per year. But then, perhaps an undisclosed element of his plan is that he intends only the barest of coverage.

Another cost of long-term disability insurance, of course, is evaluating claims and determining which have merit. Orszag notes that his plan shifts this responsibility from the government to insurance companies, and is concerned that they'll wrongfully deny claims:
Another concern is that private insurance firms would need to be given substantially expanded responsibility for evaluating workers’ disabilities. Mr. Autor and Mr. Duggan propose to mitigate this potential problem by suggesting that workers be allowed to appeal any such evaluations to state government agencies.
It's interesting to me that Orszag simply assumes that insurance companies will be dishonest in their dealings with disabled workers, but perhaps he has some experience with how the insurance companies work (when they're not paying out claims or bonuses with government money). But let's think about this for a minute: The injured worker comes to the insurance company with documentation from a medical professional that supports a disability claim. The insurance company reviews the information, often referring the injured worker to its own doctor for an "Independent Medical Examination" (IME). If the worker doesn't like that outcome the worker can appeal to... would it be the Social Security Administration? And the SSA would evaluate whether the denial was appropriate, with the associated cost of having somebody review the medical records and perhaps after ordering a medical exam of its own? Then either the worker or employee could appeal the decision? It's beginning to sound a lot like worker's comp - and it's beginning to sound likely that injured workers will need representation through this process to stand up to the insurance industry's lawyers. So in order to avoid having the SSA make a determination of who is or is not disabled, we're going to have the insurance industry make the easy calls, still have the SSA make the more difficult calls, and add significant transactional costs? Sheer genius.

But again, that's only for workers covered by an employment-based disability policy and, again, that's not the body of workers Orszag believes are responsible for the rise in dubious claims. So we're vastly increasing cost, probably not creating any efficiency for the approval of disability claims (despite Orszag's pretense that private disability benefits "would kick in within 90 days of the onset of disability" - because even if insurance companies work that fast in the easy cases, the rest are likely to end up in government reviews that take months or even years to resolve through administrative hearings and litigation), and are likely making the rest of the system far less efficient. All the while adding to the cost of hiring workers, with no reason to believe that FICA taxes will go down.

Orszag's most frequently criticized conceit is this:
Today, however, many people with disabilities are able to engage in some form of work — even if they can’t admit that and still keep their insurance benefits. Cutting off access to the workplace in this way is both unfortunate and unnecessary — and reinforces the threat that the current downturn could cause a long-term reduction in the share of people who work.
Perhaps it's that he's never worked a blue collar job, or spent any appreciable amount of time with people who work blue collar jobs. Not everybody is cut out for a desk job. Further, even assuming we can retrain an injured worker to transition from a job that centered on physical tasks to one that centers on a desk and computer, when job seeking that worker will be up against younger workers with superior skills and experience. And, as previously noted, Orszag's proposal will increase the incentive of employers to not look past those issues and hire a worker who is disabled from more physically intensive work, because that employee will already cost more to insure and will be a higher risk for a disability claim.

Further, Orszag assumes that the population he describes - people who spend at present up to 99 weeks fruitlessly searching for jobs before desperately applying for disability benefits - don't want to work. The facts would appear to belie his assumption. I don't question that some desperate individuals who could work are seeking disability benefits, but I see no basis for Orszag's implicit assumption that they have the option of returning to work. They can't find jobs.

The elephant in the room is that the Social Security Disability system is not sustainable based upon its present 1.8% payroll tax. But it's not clear why Orszag believes that it would be better to create a massive private bureaucracy to cover (for some workers, and apparently not those at the root of the problem) the first two years of disability. As previously noted, his assumption appears to be that cost savings can be achieved through an increase rate of denials or possibly by bare bones retraining programs associated with bare bones benefits (assuming his dollar figure is to be believed), but his proposed system of appeals would seem to evaporate any such "efficiency". Is the word "tax" so toxic that he is proposing a cumbursome, expensive pseudo-privatization, a backdoor payroll tax the costs of which will be passed to workers, as opposed to a modest direct increase in payroll taxes?

Although Orszag's tenure with the CBO was short, one would think he would review its relevant findings in relation to his arguments. While Orszag offers the truism, "the weak labor market has driven more people to apply for disability benefits that they qualify for but wouldn’t need if they could find work", the CBO acknowledges the underlying reality,
When opportunities for employment are plentiful, some people who could qualify for DI benefits find working more attractive. Conversely, when employment opportunities are scarce, some of those people participate in the DI program instead.
Orszag may not like it, but under the law it's quite possible to qualify for SSDI yet be physically able to hold a regular job. I've known quite a few lawyers over the years who had significant physical maladies but were able to continue to work. None of them could have performed a job requiring a significant amount of physical labor, but they were able to make handsome livings from behind a desk. But we should recognize their position as exceptional, not pretend that it can be generalized to populations of similarly disabled workers who don't have the same academic and professional training or income opportunities. Even if he were disabled, Orszag would likely be able to perform the tasks required in his @$3 million/year Citibank sinecure. His biggest mistake is believing the rest of us our as lucky - sort of an "If Stephen Hawking can make a nice living writing bestselling books on theoretical physics, why can't anybody" approach to the problem.

But just as a salary vastly higher than could be achieved from SSDI benefits can serve as an inspiration for white collar workers to stay on the job despite disabilities, the same is true even with much more modest salaries for the largely blue collar workers who are at the center of Orszag's proposed reform. All they need are jobs. Meanwhile, it would make sense for government to focus on reducing barriers to the disabled for entering and reentering the workplace, rather than proposing reforms that increase costs to employers and thus make them less likely to hire older and disabled workers.

1 comment:

  1. While I understand the importance of keeping workers from becoming disabled, and that if workers transition to SSDI they're not likely to return to the workplace, I suspect that actual fraud and waste are much more likely to be occurring within the context of SSI. But I don't see a reason in either context to assume that the number of recipients abusing the system is so large that we have to tip over the apple cart.