Partial Benefits in the Social Security Disability Insurance Program

ABSTRACT The current U.S. Social Security Disability Insurance program is an all-or-nothing system that has been criticized for creating strong work disincentives. In an empirically grounded and calibrated life-cycle model, I simulate behavioral responses to a partial disability benefit system, a policy alternative to the current program, which allows individuals to claim partial disability and combine earnings with disability benefits. Simulation results show financial savings for the program as well as welfare improvements for individuals with disabilities. INTRODUCTION The Social Security Disability Insurance (DI) program is the primary public long-term disability insurance program for disabled workers in the United States. It is intended to insure against substantial loss of earnings capacity due to severe health problems. According to the Social Security Administration (SSA), $128.9 billion was paid to 10.6 million beneficiaries (disabled workers and qualified dependents) in 2011. The program has grown significantly over time and is likely to grow faster as baby boomers reach ages with increased disability rates and because increasing life expectancy raises the duration of benefit receipt among those entering the DI program. As SSA trustees have pointed out in their annual reports (2012, p. 4), the projected growth of the DI program will endanger the solvency of not only the DI program but also the Old Age (OA) program if it necessitates a reallocation of Social Security payroll tax revenues between the two programs. Since the inception of DI, a series of policy changes has been implemented to improve work incentives and program solvency, but the effects of those reforms have been limited. (1) In this article, I examine the effect of a partial disability benefit program, a policy alternative that fundamentally changes the DI program and that could potentially better foster work among the disabled. This policy alternative, which offers partial benefits to disability applicants who can still work, would be an important complement to the "$1 for $2 Benefit Offset" program that SSA is currently evaluating in a national demonstration project. (2) The Benefit Offset policy gradually reduces the full benefit for DI beneficiaries who return to work. In effect, the Benefit Offset policy offers partial benefits ex post (to current beneficiaries who return to work), while the partial benefits discussed in the present article are offered ex ante (to applicants who still work). The combination of the Benefit Offset policy, an ex post partial benefit system, with an ex ante partial benefit system, would result in a "symmetric" DI system that could curb opportunistic behavior and promote continuous attachment to the labor force among the disabled. Public contributory disability programs with partial benefit options are not at all unusual in OECD countries. (3,4) For example, Sweden implemented a 1SEK for 2SEK Offset policy in January 2010. As the Swedish Minister of Social Security, Husmark Pehrsson (2009), pointed out, a policy of active social inclusion must "contain two important elements--first, early intervention during the sickness spell, and second, a policy to remove barriers to reenter the labor market after a period of sickness or unemployment. Only if we combine these two strategies will it be possible to maintain a generous welfare system and a high labor force participation rate simultaneously." The promise of a partial benefit system is the simultaneous promotion of support to disabled individuals and program solvency through the encouragement of labor force participation whenever possible. Introducing Partial Benefits Into the DI Program The current DI program is an all-or-nothing system that implements a full disability definition: eligibility requires an individual to demonstrate an inability to engage in any substantial gainful activity for a long period of time. …