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Disability and work: Challenge of incentives

More working-age adults are leaving the workforce because of disability, owing in part to demographics, the economy and changes in program eligibility

January 29, 2015


Dulguun Batbold Research Analyst
Ron Wirtz Editor, fedgazette
Disability and work: Challenge of incentives

Video: fedgazette editor Ron Wirtz on disability and work

The Quick Take

Enrollment and spending in two major federal working-age disability programs have been rising nationwide and in the Ninth District since the 1980s, with growth accelerating significantly since 2000. A number of factors are thought to be behind the steady rise in disability beneficiaries among working-age adults, including shifting demographics, changes in program eligibility, fallout from recessions, and low termination rates that stem from tight caps on work earnings and the desire of many recipients to keep critical health care coverage.


Mark Kennebeck, an SSDI recepient, would like to work full time, like others in this Minneapolis skyway, but is restricted by limits on earnings.
Photo by rau+barber

Talk to Mark Kennebeck for two minutes, and you can’t help but notice his outgoing nature. “The thing I have going for me, I think, is my personality. I’m real outgoing. I’m likable, and I love dealing with people.”

Kennebeck, who has a physical disability, leveraged that personality into a career milestone. After several security jobs in his early adult years, he landed a job at Best Buy, starting in the warehouse stocking shelves. Before long, he was offered a sales job, “and at the time, there was no one with a disability on the floor at the store where I worked,” he said. “I was good, and it was awesome. I was a breakthrough person. I broke the barrier to people [with a disability] being on the floor in the store.” Working part time, things went so well for Kennebeck that “it got to the point where they wanted me working [full time] on a constant basis.”

While that might seem like a good thing, it presented Kennebeck with a difficult choice. He has Apert syndrome, a genetic disorder characterized by the premature fusion of certain skull bones, which affects the shape of the head and face and also results in fused (or webbed) fingers and toes. The disability qualified him for benefits through the Social Security Disability Insurance program, including a cash stipend and health insurance via Medicare. He called SSDI “a lifesaver,” and he has been receiving benefits for about the past decade and a half. “If it wasn’t for SSDI, I’d be living in a cardboard box and eating ramen noodles every day.”

Working part time—in all of his jobs—Kennebeck has depended heavily on Medicare for medications and other expensive care to help manage his disability. Working full time with Best Buy would have brought health care benefits, but most employer plans are not as comprehensive or affordable as Medicare. SSDI also limits the amount of monthly income—$1,090 this year—that can be earned before losing the cash stipend and Medicare health care benefits entirely. Working full time would have put him over that amount, and once off SSDI, “it’s a pain in the butt to get back on,” Kennebeck said.

Kennebeck left Best Buy in 2012, after eight years, and now works part time as a personal care assistant for an individual with more limiting disabilities, ever vigilant about the amount of work he puts in.

Kennebeck left Best Buy in 2012, after eight years, and now works three days a week as a personal care assistant for Scott Engstrom (left).
Photo by rau+barber

“I love it, but I’ve got to keep [SSDI] in mind because I can’t make over $1,000 a month, which frustrates the hell out of me because if you make over a thousand bucks a month, you’re off,” he said. “And for someone like me, I need [SSDI].”

Like Kennebeck, millions of people with disabilities are well-served by and, indeed, saved by, federal disability programs. However, Kennebeck’s story suggests that those with disabilities who want to work can be frustrated by the rules and guidelines governing working.

The federal disability programs—SSDI, as well as Supplemental Security Income (SSI)—are also coming under increased scrutiny because their rolls, and related public expenditures, have increased rapidly over the past 30 years. The reasons for this increase are both simple and complicated. Changing workplace demographics—like the rising age of workers—are behind much of the enrollment increase. But over the years, changes in eligibility rules and the economic downturns have also induced more disability beneficiaries.

Once on disability, few working-age recipients ever leave the program, even those with considerable capacity for work. This stems, in part, from rules that cap allowable work earnings by disability recipients, the violation of which results in total loss of cash and, even more important, critical health care benefits. This one-way door into federal disability programs has shrunk the available labor pool and seems to be limiting the work lives of those who are capable—and often desirous—of more work.

The big picture

Disability is often viewed narrowly, as something that is present at birth and developmental in nature, like Down or Apert syndromes. A broader perspective is that disability is a multidimensional phenomenon involving a wide range of disorders that influence physical and mental capacity, and whose onset can come at any time during a person’s life.

Related content

The basics: SSDI and SSI

Eligibility and awards
Though overall award rates are low, persistence tends to pay off

Are you in good hands?
Different programs offer protection for short- or long-term disability

Some live with life-long disabilities—like blindness for Walter Waranka, an employment counselor at Lifetrack Resources, a nonprofit in St. Paul, Minn., that offers a variety of services to individuals and families, including job counseling and placement for those with disabilities.

But so-called developmental disabilities like congenital blindness are but one of many forms of disability, Waranka said. “Then there’s the group who join at any particular time in their life through multiple reasons—through an accident, like diving in the pool and paralyzing themselves, or working in modern work environments and getting carpal tunnel [syndrome] to those who may lift something wrong on the job” and suffer a debilitating back injury, Waranka said. There are also those who suffer no physical malady, but struggle with mental illness—something Waranka specializes in professionally. This covers a multitude of conditions, including anxiety, mood disorders like depression and bipolar illness, psychosis and post-traumatic stress disorder.

Congress decided in 1956, with the creation of SSDI, that workers with a disorder that prevents gainful employment should receive some income support. Further help for disabled people came in the early 1970s with the creation of SSI for the very poor, most of whom qualify as a result of disability (see The basics: SSDI and SSI for descriptions of both programs).

Both programs have experienced significant growth in applications and final awards, starting in the 1980s and continuing every decade. From 2000 to 2013, annual applications for SSDI nationwide doubled, according to the Social Security Administration (SSA) (see Chart 1). Annual awards rose by almost 43 percent over the same period. These rates include a drop in both measures in recent years.

Large chart

As a share of insured workers (those contributing payroll taxes to Social Security), the current rate of SSDI awards is about 50 percent higher than levels in the 1980s. With comparatively low termination rates from the program (more on this later), total workers receiving SSDI almost doubled from 5 million in 2000 to almost 9 million in 2013. Another 2 million receive benefits as the spouses and children of workers with disabilities.

Applications and awards for SSI have also climbed, though at a somewhat lower trajectory. Nevertheless, total disabled recipients nationwide rose from 5.2 million in 2000 to 7.1 million in 2013.

As a share of the labor force, SSDI and SSI enrollments are smaller in the Ninth District than in the nation as a whole (see back page map for SSDI comparison). Still, district states are seeing similar enrollment trends in both programs (see Charts 2 and 3; detailed, state-level data go back only to 2002). From 2002 to 2013, SSDI worker beneficiaries in district states increased by 68 percent compared with 61 percent nationally. Wisconsin has seen the strongest increase in SSDI, at almost 80 percent. North Dakota saw the smallest increase (almost 50 percent), including a small—and virtually unprecedented—decrease in worker recipients in 2013.

SSI enrollment in Ninth District states grew by 37 percent over the same period, with Minnesota, Montana and Wisconsin all seeing faster growth in recipients than the national rate of 27 percent, while the Dakotas saw slower growth.

As enrollment has risen, so has the expense of disability programs. In 2013, cash benefit expenditures in the United States were $140 billion and $48 billion for SSDI and SSI, respectively, according to the SSA. Despite leveling off in recent years, SSDI cash benefits in district states rose more than 90 percent from 2000 to 2013, reaching $5.3 billion (see Chart 4).

Health care is also a major expenditure for both disability programs. In 2012, people enrolled in SSDI received $69 billion in Medicare services, according to the SSA. Health care costs for those with disabilities on Medicaid reached $147 billion in 2010, or about 45 percent of all Medicaid expenditures by states and the federal government. (However, it’s unclear from the data how much of this care went solely for SSI recipients with a disability.)

Disability up, labor force down

Rising disability rates also have not-so-trivial effects on the labor force. In 2013, 8.3 percent of the U.S working-age labor force received benefits from either SSDI or SSI, up more than 2 percentage points since 2003 (see Chart 5). The Ninth District average crept up from 4.4 percent to 6.2 percent over the same period. Though individual state rates vary considerably, none are above the U.S. average.

This increase in disability incidence translates to tens of thousands of additional workers in district states who are either out of the labor force or working on a limited basis, offering at least a partial explanation for steadily declining labor force participation rates. Calculations by the fedgazette suggest that labor force participation rates in the Ninth District in 2013 would be higher merely if disability rates in 2002 and 2007 had held steady, all other things held constant (see Chart 6). A more formal study by the Federal Reserve Bank of Atlanta found that the increase in disability was the second leading contributor (behind an aging population) to the nation’s falling labor force participation rate. Disability accounted for about one-quarter of the three-percentage-point decline in national labor force participation between 2007 and 2014.

There are a handful of reasons for the increase in disability recipients. Stephen Goss, chief actuary for the SSA, told Congress that much of the increase is due to demographic factors. Over the past four decades, more women entered the workforce, which pushed up the number of workers covered by SSDI (by contributing payroll taxes to Social Security and achieving the necessary work history). Women’s disability rates also have been rising, catching up with male counterparts. The overall age of the workforce has been rising as well, and aging is directly related to higher disability. Increases in the Social Security retirement age have kept those with the highest disability rates on the job longer.

Exactly how much these factors explain the overall increase in disability is debatable. Most analysis on the topic suggests that demographic factors do not fully account for the rise in disability. But the role of other factors is difficult to determine because they tend to be more idiosyncratic. Disability itself is not always easily defined in terms of the capacity for work and eligibility for nonwork benefits. While eligibility guidelines are extensive, there also have been numerous changes over the years that have a major influence on who applies for and receives disability benefits.

One of the biggest changes occurred in the 1980s when Congress made broad and difficult-to-verify disorders such as mental illness and musculoskeletal conditions (like back pain) eligible for benefits. From 1982 to 2013, SSA figures show that the share of (growing) annual awards for these two disorder categories rose from 27 percent to 53 percent.

Another wild card in disability trends is the state of the economy. While economic conditions would seem to be mostly independent of a person’s health and disability status, eligibility guidelines for disability benefits consider age, education and work experience, as well as whether the applicant has realistic employment opportunities.

These so-called vocational factors are particularly relevant for older applicants and those with limited skills and education—factors that come into play more frequently during recessions when competition is fierce for limited job opportunities. In a recession, disabled workers “are the first ones not hired or the first ones fired, and there’s not another job to just go get,” said Anne Quincy, a staff attorney at Mid-Minnesota Legal Aid.

Quincy has worked in disability benefits since the 1980s, “and I’ve seen several waves come through.” Her office takes mostly SSI cases—applicants who “are very poor and don’t have a long work history” that would allow them to qualify for more generous SSDI. She said there was a “big uptick” in clients four years ago because of the recession, particularly among older workers and those with mental disorders.

Large map

And it doesn’t necessarily take a recession to affect vocational eligibility for disability; the long-run health of local economies also appears to have a major impact on the incidence of disability. A closer, county-level look at the Ninth District shows that SSDI rates fluctuate considerably within states. A handful of northern counties in Minnesota, Montana and Wisconsin, as well as most of the Upper Peninsula of Michigan, have disability rates exceeding 8 percent of the labor force (see Map 1). These areas have also experienced the highest growth in disability rates since 2000 (see Map 2).

Large map

Each of these high-disability regions has higher-than-average unemployment, and an analysis of the Ninth District’s 303 counties shows a high correlation between unemployment and disability rates (0.78; a correlation of 1 would mean they move in perfect synchrony; see Chart 7). In June 2013, unemployment in the Upper Peninsula of Michigan still stood at 10 percent, two full percentage points higher than the national average and three times the level in North Dakota, which has one of the strongest economies in the country and, coincidentally or not, one of the country’s lowest disability rates. Disability is comparatively invisible in the booming western area of the state, where oil activity has also attracted a much younger workforce less prone to disability. It is important to note that these correlations do not necessarily imply causation from unemployment to disability, but the numbers are striking.

High unemployment appears to be a trigger for other factors that lead to rising disability rates. In the U.P., “what you’re seeing is a result of younger generations moving out of the areas in question to find jobs and the older generations sticking it out and finding any way they can to survive,” according to Brenda Owen, executive director of the Michigan Association of Timbermen. “And if that means finally applying for SSDI, then that’s what they’ve done.” As younger workers move out of the region, Owen said, the remaining working population becomes older and statistically more likely to experience disability.

U.S. Census data give credence to that theory. The U.P.’s population dropped by more than 10,000 from 2000 to 2009; the number of 20- to 44-year-olds fell by about 13,000, while the population aged 45 to 64 rose by 12,500.

What has evolved, according to a number of sources, is a disability system that increasingly covers “unemployability”; workers with some underlying health condition—but who are still capable of working—who face other obstacles to self-sustaining employment, such as poverty or low education and skills. In a widely cited 2011 NBER paper, MIT economist David Autor said that there “is no compelling evidence that the incidence of disabling conditions among the U.S. working-age population is rising.” He called the federal disability programs “a de facto safety net for individuals whose primary barrier to employment is limited labor market opportunities rather than debilitating health conditions.”

To work or not to work

Complicating the matter is that very few workers who go on disability ever come off. In a given year, roughly 8 percent of U.S. disability recipients are terminated from the program. But most terminations are due to people dying or reaching full retirement age, when SSDI recipients make the transition to old-age retirement benefits (see Chart 8). Nationally, only 1 percent of disability recipients are terminated annually because of medical improvement or a return to work. In five district states, there were roughly 350,000 SSDI recipients in 2013. Only 1,358—less than half a percent—lost their benefits because of a successful return to work, according to SSA figures.

The reasons for low termination rates offer a glimpse at the difficulties faced by those who need help managing a disability, but are interested in and capable of work.

When Congress created SSDI over half a century ago, disability and employability were viewed as mutually exclusive. You either were disabled and unable to work, or not disabled and capable of working.

“Then the world changed,” said Mary Daly, senior vice president and associate director of research at the Federal Reserve Bank of San Francisco, who has studied disability extensively, including a 2011 book on the topic with Richard Burkhauser.

Over time, medical advances, workplace improvements and legislative efforts have helped shift society’s thinking about what it means to have a disability. Passage in 1990 of the Americans with Disabilities Act, Daly said, “broadly acknowledged that people with disabilities can and want to work, and should be integrated into the workforce.”

But over time, a subtle dichotomy has evolved in the disabled population. Those with disabilities sustained early in life are often given help to get into the workforce, at least on a limited basis. But those incurring a disability at any point during their working-age years—almost regardless of type or severity—receive benefits only if they get out of the workplace.

“They haven’t changed the public support program if you have a health shock. The only option is a cash payment,” said Daly. “It’s all or nothing.”

Just the process of getting approved for disability benefits can be discouraging. Applicants cannot file for SSDI until they have been out of work for five months. Initial approval rates hover around 20 percent to 30 percent, but there are four additional levels of appeals. The average disability recipient waits roughly a year for approval, all of which must be spent without a job.

Waiting entails taking a big financial risk. Jessica Bray is a partner at Upper Michigan Law, which has four offices across the Upper Peninsula, including in Escanaba, where Bray grew up and now practices. Bray’s client base this fall included about 65 people attempting to qualify for SSDI, she said.

“If they are turned down [initially], they have to wait 12 to 18 months” for a decision on appeal, during which they are out of a job, and many are “out of income and losing their homes and losing their cars” to pay monthly bills.

Once approved, SSDI and SSI recipients are technically allowed to work, but caps on monthly earnings are low; for SSDI recipients, the monthly limit of $1,090 is equivalent to roughly 18 hours a week at $15 an hour.

The penalty for breaching that limit is severe. “If you go one penny over—no ifs, ands or buts—you’re off,” said Waranka, from Lifetrack Resources. One of Waranka’s clients, a baker at Sam’s Club, was asked to take on more hours during the holiday season. “He said, ‘I can’t do it. If I do more than [normal], I lose my benefits,’” according to Waranka. “I get so frustrated.”

For those on SSI, outside earnings are limited to just $85 a month. In 2015, for every $2 above that amount, recipients will lose $1 out of their monthly check of $733. A bigger paycheck also erodes food assistance and other government aid received in tandem with SSI benefits, according to Quincy, from Legal Aid.

Essentially, SSI recipients face a large implicit tax for working more than a few hours a week. Recipients of SSI also “are living much closer to the margins” and have to budget very carefully, Quincy said. “There is a lot more insecurity for SSI [recipients], so they don’t work a lot” to avoid the loss of other benefits. Generally speaking, Quincy said, “you’re either on SSI and not working, or off.”

For many on disability, especially SSDI, the loss of the cash benefits would be bad, but could ultimately be made up by working, many sources said. The real pain would be losing health care benefits.

“What keeps my clients from full-time work [and leaving disability] is losing their medical benefits,” said Waranka. “Health insurance for an individual with a disability, I think, is a number one concern. For most of them, there are a lot of extra expenses that come along with their disability. For mental health, it’s the drugs, the cost of medication.” With full health coverage, he said, “many of my clients would work full time.”

Kennebeck said his health coverage through Medicare was “a lifesaver because I’m on seizure medication and I do a refill a month, and that’s 200 bucks; whereas, I only pay a little over three bucks. … Heaven forbid something happens, [like] you get in a car accident. [But if so], it’s there and it helps you.” He added that if the income limits “could be less restrictive than what it is, it would be awesome, because … I want to be working more, but I really can’t because I’ve got to be careful of my SSDI.”

For SSI recipients, “Medicaid is huge; it’s absolutely the key,” said Quincy. Without access to health care, many of her clients wouldn’t be treated for their conditions, with disastrous consequences.

A rising disability rate, coupled with a dropping employment rate among this population, has created a public perception with “two extremes,” said Daly, from the San Francisco Fed. Individuals are either “all cheaters, or they are all incapable of work. Neither is true,” she said. A person might know someone on disability “and see them playing tennis with their kid and say, ‘See, everyone’s a cheater,’” Daly said. “They are not all cheaters. They are responding to the incentives” embedded in disability programs.

On the flip side, many believe that anyone with a disability has severe, debilitating limitations, when in reality disabled people have a wide range of limitations and capabilities, Daly said. “They are a very heterogeneous pool,” but treated as a very homogeneous one.

“I think we’ve turned a weird corner in our culture that we’ve become more suspicious of people just trying to rip things off,” said Waranka. “Yes, there are those out there. You always hear about the guy who says, ‘Oh, I hurt my back and I can’t come into work.’ And then … he’s out there bowling, running around and playing on a trampoline. But, unfortunately, I think we let that be the rule when it’s just an exception.”

Waranka is himself an exception, but in a very different sense. Waranka is one of the few who has left SSDI. His blindness qualified him for SSDI at age 18. He went to school and worked during his early adult years, “but I never made enough to get kicked off.” It wasn’t his intent to keep his benefits at all cost. Otherwise healthy aside from his vision, he said he didn’t need health benefits in his early adult years, and program compliance “was a headache,” according to Waranka. He had to go to meetings to verify his disability—“yep, still blind”—and, when employed, he had to mail in check stubs to prove he was not earning more than income limits. “I wanted to get off,” said Waranka. “I wanted to be fully, completely independent,” a status that he eventually achieved through his job with Lifetrack.

Insolvency issues

The trajectory of disability recipients and benefit costs is starting to get some attention from policymakers because the SSDI trust fund that pays for disability benefits is expected to become insolvent next year. Simple fixes are available—like shifting more payroll tax revenue to the disability trust fund from the old-age retirement trust fund, which is projected to remain solvent for roughly the next two decades.

“It’s an easy way to fix it in the short term. [But] no economist is on board with this,” said Daly, because it doesn’t fix the underlying problem. In her view, the underlying problem is the disincentive to work. The existing system “is a double drain on the economy” because benefits are being paid out, increasingly to workers in their prime working years, and the taxes these workers would otherwise generate are being lost. “This is a critical issue and a building problem for the U.S.”

There are programs available through Social Security that give disability recipients an opportunity to test full-time work without financial penalties (Trial Work Period) or offer full-time job seekers rehabilitation and other support services (Ticket to Work). Waranka said such programs are laudable, but they don’t allow recipients to build the work history necessary to obtain good-paying jobs with health benefits that would allow them to safely forgo disability benefits.

Participation in these back-to-work programs is low, as evidenced by very low rates of disability termination for those who out-earn income limits. Ticket to Work is part of a larger vocational rehabilitation (VR) reimbursement program, where SSA pays state VR agencies for services that result in significant work earnings for beneficiaries. According to the SSA, in 2013 it paid state VR agencies $138 million for employment-related outcomes for about 10,000 beneficiaries. That represents one-tenth of 1 percent of workers receiving SSDI, and an even smaller percentage of program expenditures.

Some believe the Affordable Care Act offers a real opportunity for those looking to get off disability. For example, “pre-existing conditions can’t be excluded from coverage any longer, so that’s a big plus” in terms of finding private insurance, according to Anne Henry, an attorney with the Minnesota Disability Law Center. She added that as part of the ACA, Minnesota expanded its Medicaid program (called Medical Assistance), offering coverage to individuals with higher income thresholds (138 percent of the federal poverty level, or about $16,000), and it “doesn’t require a person to seek disability status and prove they are totally and permanently disabled and can’t work.”

A December report by the Minnesota Department of Health and Human Services found that the steady increase in disability care through Medical Assistance had pivoted in January 2014. It noted that “substantial numbers” of new enrollees, who in the past needed a disability determination to be eligible for MA, are now entering under the general category of “adults with no children” because of the higher income limits.

Quincy, from Legal Aid, said the ACA “has made it easier for people with disabilities [in Minnesota] to choose whether and how much they will work. I think it factors into people being less afraid to get off disability benefits, and I’m already seeing it factor into people’s choice about whether to apply to get on disability benefits in the first place. I think it is beginning to dawn on people that the cliff—that point where you earn $1 too much and lose not only your [disability benefit] income, but your health coverage as well—is gone.”

However, the circumstances are different for those in Montana, South Dakota and Wisconsin, which did not expand their Medicaid programs in a fashion similar to Minnesota. In many cases, expanded health care access in these states is limited to low-income subsidies for marketplace insurance.

Early intervention

It has been argued that it is important to shift the disability focus upstream, helping workers avoid entry onto disability rolls in the first place, possibly through early recognition and treatment of disorders, workplace modifications or retraining for jobs that can better accommodate a worker’s limitations and provide a sustainable income.

Daly argues that the government should “intervene very early when workers have a health shock. We need to keep people in the labor force” because research has consistently shown that trying to get back into the workforce after leaving is difficult, and more so the longer one is out of work. Hypothetically, such a shift could also curb government disability expenditures, despite higher initial costs, because short-term services are less expensive than long-term cash and medical benefits.

Daly stated that a major obstacle to changing current programs is the fact that SSDI is part of Social Security—“the third rail of politics … and SSI is along for the ride”—and any proposals for change face many embedded interests. As a result, “nobody wants to touch it. … You don’t have the political climate to do reforms.”

Research in 2013 by Daly and three other academics found that countries like the Netherlands, Sweden, Great Britain and Australia faced similar surges in disability enrollments and managed to enact reform. “But they were more generous programs that got out of hand, and were fiscally insolvent and had a tipping point” that provided the political impetus for change, she said. “We’re starting to get to that point,” particularly given the status of the SSDI trust fund.

Kennebeck, for one, welcomes the opportunity for further discussion on disability, benefits and employment. If someone earns more than SSDI caps allow, he said, “maybe decrease that amount [of cash benefit] that you get, and not completely cut you off. I’m not saying give somebody all the cash in the world, but at least help them out a little bit.”

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.