Social Security Disability Insurance: Information on Potential Implications of Expanding Private Disability Insurance
Released: 2018-04-10T00:00:00

Letter

Background

Social Security Disability Insurance (SSDI)

In recent decades, economic and demographic factors have contributed to an increase in the number of SSDI beneficiaries and increased program costs, which has reduced the size of the Disability Insurance Trust Fund reserves from a peak of $215.8 billion in 2008 to $46.3 billion in 2016. Over the past 26 years, the total number of SSDI beneficiaries more than doubled, from 4.2 million in calendar year 1990 to nearly 11 million in calendar year 2016. By contrast, during that same time, the number of workers covered by SSDI increased by less than a third—from 133 million to 171 million. In calendar year 2016, around 8.8 million workers with disabilities and 1.8 million dependents (spouses and children) received SSDI payments, totaling $142.7 billion, of which $133.6 billion was paid to the workers and $9.1 billion to their dependents.

Private Disability Insurance (PDI)

In most cases, long-term employer-sponsored private disability insurance (PDI) is paid for by the employer and provided as part of a package of benefits for employees, although sometimes employees are required to pay some of or the entire PDI premium. According to one industry survey (the most recent available), in 2013, 19 PDI companies covering about 75 percent of the PDI market policies provided PDI benefits to around 653,000 individuals, with annual payments totaling around $9.8 billion.

Another industry survey estimated that the five largest insurers in the PDI market held about half of the market share of premiums paid. PDI policies can be offered either on an opt-in basis, in which employees who choose to pay for PDI receive it, or on an opt-out basis, where employees are automatically enrolled in PDI, but can decline (opt-out of) the insurance.

Other Disability Protections for Workers

Beyond the insurance market for PDI, workers may be eligible for other types of disability protection through their employment. For example, 38 percent of workers have employer-sponsored short-term disability coverage according to BLS, but unlike SSDI, this coverage typically lasts 6 months. In addition, state workers’ compensation programs generally provide payments and assistance to individuals who are injured on the job, while both SSDI and PDI are designed to replace lost income from the onset of any disability regardless of whether it was work-related. Also, some workers may be eligible for disability payments through defined benefit pension plans. These benefits, commonly known as disability retirement benefits, provide eligible workers with early retirement payments if they can no longer work because of the onset of a disability. According to BLS data, many workers covered by defined benefit pension plans are state and local workers, though these data do not show what portion of them are not covered by SSDI.

Proposals to Expand PDI

From our literature review, we identified three distinct proposals for expanding PDI in order to potentially alleviate financial challenges facing the SSDI program. These proposals were made in studies authored by: David Babbel and Mark Meyer (Babbel and Meyer) of Charles River Associates, Rachel Greszler (Greszler) of The Heritage Foundation, and David Autor and Mark Duggan (Autor and Duggan) for The Center for American Progress and the Hamilton Project. While the proposals differed in how PDI expansion might be achieved, each proposal assumes or requires that PDI coverage would provide vocational assistance, workplace accommodations, and partial income replacement to employees with work-limiting disabilities. Each proposal assumed that PDI expansion would result in the provision of effective return–to-work assistance earlier than would occur under SSDI. According to the authors, their proposals would slow the growth of the SSDI program by increasing work attachment of potential applicants or beneficiaries of SSDI and reversing the decline in employment rates of work-capable adults with disabilities, thereby improving the long-term solvency of the Social Security system. Two of the proposals suggested piloting the approaches to assess potential savings and implementation issues.

SSDI Covers a Much Larger Portion of the Workforce than PDI, and Features of Coverage Differ

SSDI Covers Almost All Workers, Whereas PDI Covers About One-Third of Workers, Who Are Generally Higher-Paid

According to our analysis of SSA and BLS data, nearly all American workers pay Social Security taxes and are potentially covered by SSDI, while only a third of workers have PDI coverage. For SSDI, an estimated 96 percent of American workers, along with their employers, pay Social Security payroll taxes, a portion of which are used to fund SSDI. Of individuals aged 20 or older in 2016, 87 percent met the SSA work requirements to be eligible for benefits in the event of a disability.

By contrast, as of March 2017, the Bureau of Labor Statistics (BLS) estimates that approximately 33 percent of the workforce is insured by employer-sponsored PDI where the employer pays at least some of the premium. Employees may also pay the entire premium of employer- sponsored PDI—and researchers we interviewed from three private sector organizations that survey the PDI market told us that these plans are a minority of the PDI market. However, neither BLS nor industry surveys comprehensively track the extent of PDI coverage where employees pay 100 percent of the premium cost.

In addition, while SSDI coverage is higher across all industries and income levels, PDI coverage is much more prevalent at higher wage levels and in certain occupations and industries than others. In particular, as of March 2017, 60 percent of those in the highest 10 percent of wage earners had PDI, whereas 4 percent of those in the lowest 10 percent did (see fig. 1).

Our analysis of BLS data found that differences in PDI coverage also exist by occupation and industry. Specifically, 60 percent of workers in business and financial operations occupations have PDI coverage, compared to 16 percent of workers in construction, extraction, farming, fishing, and forestry occupations that have PDI (see fig. 2). Broad differences in PDI coverage also exist by industry; for example, 83 percent of workers in utilities have PDI, but only 5 percent of workers in leisure and hospitality have PDI (see fig. 3). According to researchers from one organization with whom we spoke, the higher rates of PDI coverage reflect areas where labor markets are more competitive, leading employers to offer PDI to attract employees.

SSDI and PDI Differ in Many Respects, Including Eligibility, Benefit Level, and Approach to Return to Work

Eligibility

Our review of SSDI program rules and PDI policies indicates that eligibility for PDI is similar in some ways to eligibility for SSDI. For example, both allow individuals with many types of disabilities to receive benefits until retirement, recovery, or death. However, there are also some significant differences, as SSDI and PDI have different definitions and employment requirements. According to SSDI program rules, to meet SSDI’s definition of disability, an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least 1 year or to result in death and (2) prevents the individual from engaging in substantial gainful activity. SSA uses a list of medical conditions—established in regulations—that it considers severe enough to entirely prevent an individual from working. Benefits can also be provided for medical conditions that are not on the list if the medical condition or combination of medical conditions meets or equals the severity of those on the list. SSA also considers additional factors— such as an individual’s residual functional capacity, relevant past work, age, education, and work experience. SSA can determine that the medical conditions combined with the applicable factors preclude the individual from performing his or her prior work or any other work in the national economy. Eligibility for granted SSDI benefits continues until retirement or death, or until SSA deems that the underlying medical conditions have sufficiently improved or that the individual has become gainfully employed.

In contrast, typical PDI policies have provisions related to inability to work that may compensate workers in a wider range of circumstances than SSDI does, although these provisions become more strict after 2 years. For the first 2 years of PDI benefits, policies generally define disability as the inability of an individual to work his or her own occupation. For disabilities that last for more than 2 years, a typical PDI policy changes how it defines disability from the inability to work in one’s previous occupation, to the inability to work in any occupation offering a reasonable income, which was 60 percent of pre-disability earnings in the three sample policies we examined. Similar to SSDI, PDI benefit payments generally continue for the length of the disability or until retirement; however, unlike SSDI, benefits paid for certain conditions, such as mental health conditions, are generally limited to 2 years. Also unlike SSDI, PDI policies typically include a pre-existing condition provision, whereby benefits are not paid if the applicant received treatment, services, or consultation or took medication for the condition in the 3 months prior to being insured.

The requisite time period between the onset of a disability and when benefits can begin is comparable between SSDI and PDI, according to our review of SSDI program rules and PDI policies; however, the time it takes to process and make decisions on claims may run longer for SSDI. For both SSDI and PDI, benefits do not usually start immediately upon disability onset. SSDI and PDI applicants must apply for benefits and usually wait for a period of time—known as a waiting period for SSDI and as an elimination period for PDI—for payments to begin. The waiting period for SSDI benefits is 5 months after disability onset. For the PDI policies we examined, the elimination period ranged from 3 to 6 months after onset. Another factor affecting the time to receipt of benefits is the time it takes to award the benefit. For PDI, federal regulations under the Employee Retirement Income Security Act of 1974 (ERISA) that govern claims in ERISA-covered plans, including disability claims, generally require initial claims to be decided within 45 days after receipt of the claim by the plan, with some ability to extend for two 30 day periods based on reasons beyond the plan’s control. PDI claimants may also appeal the initial decision. On the other hand, based on our review of SSDI program rules, claims for SSDI are not subject to timing requirements established by law. Further, denied claimants may appeal the initial decisions. The average decision time for appeals before Administrative Law Judges in fiscal year 2017 was 605 days, according to SSA’s fiscal year 2017 performance report.

Our review of SSDI program rules and PDI policies also indicates that individuals are required to have longer employment periods for SSDI eligibility than for PDI, but PDI is generally not portable if the individual leaves the employer offering PDI. According to SSA guidance, individuals become eligible to receive SSDI payments after they have paid the Social Security payroll tax long enough—about 10 years for many—and recently enough to accumulate the required number of credits. In contrast, the three sample PDI policies we reviewed contained 30-day waiting periods for coverage to begin. Further, part-time status and job changes affect PDI more than SSDI eligibility. SSDI’s program rules generally allow for the work credits that an individual has accumulated to continue to count toward SSDI eligibility even if the individual is working part-time, changes jobs, or becomes unemployed or otherwise leaves the workforce. In comparison, PDI coverage, which is offered at the discretion of employers, is not generally portable, and may exclude part-time workers altogether—as was the case for the three “typical” PDI policies we reviewed. Nationally, PDI coverage is much more prevalent among full- time workers than part-time workers. According to BLS data, 42 percent of full-time workers and 5 percent of part-time workers have PDI where the employer pays for all or part of the premiums. See Table 1 for a comparison of SSDI and PDI eligibility features.

Our review of SSDI program rules and PDI policies indicates that SSDI benefit levels for individuals are generally lower than PDI but are designed to provide more income replacement for low-income workers than higher-income workers. Under federal law, SSA determines benefit amounts using a progressive formula, whereby low-income beneficiaries receive relatively higher benefit payments based on their average monthly earnings over the course of their career. For calendar year 2018, the formula pays 90 percent of the first $896 of the individual’s average monthly earnings, plus 32 percent of the earnings between $896 and $5,399, plus 15 percent of earnings over $5,399. (See fig. 4 for the amount of benefits SSA paid in 2018 according to prior income levels.) Using the formula, we calculated that at an average indexed annual earnings of $44,000, the monthly benefit would be $1,693, which is 46 percent of prior average monthly earnings. Under the formula, workers earning less would receive a higher proportion of their prior average, while workers earning the taxable maximum (set at $128,400 for 2018) or more would be eligible to receive $3,042 per month, which is at most 28 percent of their earnings. Under federal law, disabled workers with qualifying dependents may receive additional SSDI payments, up to 50 percent of their individual benefit amount. Therefore, according to our calculations, the maximum family benefit for average annual indexed earnings of $44,000 would be $2,540, which is 69 percent of prior average monthly earnings.

By contrast, up to certain income levels, PDI policies typically replace 60 percent of an employee’s current salary if the employee is unable to continue working his or her prior job. Therefore, a worker earning $44,000 annually in their prior job would receive $2,200 per month. For high-income workers, PDI policies typically have a monthly maximum payment. In one PDI policy we reviewed, this monthly maximum was $5,000. Employers and employees pay for SSDI through payroll taxes on employees’ wages and salaries, so the cost to employers and employees only varies based on employees’ wages and salaries. Federal law also determines the part of the payroll tax that is allocated for SSDI, half of which is contributed by the employee and half by the employer. For PDI, either employers, employees, or a combination of the two make premium payments, depending on the policy negotiated between the insurer and the employer. According to industry representatives with whom we spoke, premiums may vary based on many factors, such as wages and salaries, the length of the elimination period, rate of income replacement, type of industry, and a company’s prior claim experience.

Another difference between SSDI and PDI benefit levels is their treatment of partial benefits or partial disability determinations. SSDI program rules do not provide partial payments to individuals who have lost some but not all of their ability to earn income in the national economy. In contrast, some PDI policies may pay benefits for a partial disability. For example, in one of three policies we examined, workers could qualify for partial benefits, at lower levels, if they were partially unable to achieve their previous earnings because of a disability.

PDI policies generally require beneficiaries to apply for SSDI and, if found eligible, PDI payments are typically adjusted downward (offset) by the amount of SSDI payments. There is no similar requirement or payment adjustment for SSDI beneficiaries. In cases where PDI beneficiaries are not required to or do not apply for SSDI, PDI policies we reviewed would still reduce their PDI payment by the SSDI amount that the beneficiaries may have been entitled to receive. The PDI payments would be reduced for the full amount of the SSDI payments, including any SSDI payments for the worker’s spouse and dependents, but will typically maintain a minimum PDI benefit. The three PDI policies we reviewed provide a minimum $100 monthly benefit when the SSDI offset would otherwise totally eliminate the PDI benefit or reduce it below $100 a month. According to insurers we interviewed and PDI policies we reviewed, insurers will assist PDI beneficiaries with their SSDI applications, and if necessary, provide legal assistance for SSDI appeals processes. According to one industry survey, 72 percent of PDI beneficiaries also qualified for SSDI. PDI benefits may also be reduced by the amount of income from other sources such as workers’ compensation payments, sick leave, or severance pay from an employer.

Additionally, under federal law, SSDI confers Medicare eligibility after 2 years. In contrast, insurance associations and our review of PDI policies indicate that PDI policies do not typically provide health care benefits. Table 2 provides a summary of SSDI and PDI benefit features.

Both SSDI and PDI policies include incentives to return to work, such as allowing beneficiaries to retain some earnings when they return to work, but PDI policies may provide return-to-work services sooner than SSDI. As long as they continue to meet SSDI’s eligibility criteria, beneficiaries can earn up to the substantial gainful activity amount each month, without any impact on their SSDI benefit, according to SSDI program rules. SSDI program rules also provide work incentives in the form of a trial work period, which allows the beneficiary to receive full disability benefits while potentially earning more than the substantial gainful activity amount, for up to 9 months. SSDI beneficiaries who earn above the substantial gainful activity threshold after 9 months of a trial work period will no longer receive SSDI cash benefits, but will continue to receive Medicare coverage, if enrolled, for up to 7 years and 9 months. After the trial work period ends, the 36-month extended period of eligibility begins, during which SSDI beneficiaries are entitled to receive benefits so long as they continue to meet the definition of disability and their earnings are below the substantial gainful activity monthly earnings limit. Moreover, individuals whose benefits stopped due to work may have their benefits reinstated under an expedited reinstatement if for medical reasons they are unable to work again at some point within 5 years. Under this expedited reinstatement, beneficiaries receive up to 6 months of temporary cash benefits while SSA conducts a medical review. Despite these SSDI provisions, participants of a 2013 Social Security Advisory Board Forum have criticized the SSDI program for having poorly structured work incentives, and we have previously reported that complex SSDI rules related to these work incentives may result in overpayments to beneficiaries.

PDI policies we reviewed also provide for continued payments while beneficiaries participate in the insurer’s return-to-work program or find other employment. However, in contrast to what is referred to as SSDI’s “cash cliff,” PDI payments are gradually reduced in some ways to account for the beneficiaries’ earnings. For example, in one policy we reviewed, if the beneficiary participates in the insurer’s return-to-work program, the beneficiary may continue receiving benefit payments in addition to any employment earnings. However, unlike SSDI, the combination of the employment earnings plus the PDI payment would be capped at 110 percent of the beneficiary’s pre-disability earnings. Under this same policy, after the first 12 months that the beneficiary is disabled and working at a reduced capacity, the partial PDI payment decreases proportionally as the employment earnings increase until the beneficiary earns 80 percent of their pre-disability earnings, at which point they are no longer considered to be disabled. The other two policies we reviewed provided pro-rated PDI payments as soon as a beneficiary had some work earnings, until those earnings reach a threshold, such as 80 or 100 percent of their pre-disability earnings.

Both SSDI and PDI policies offer services and supports to beneficiaries to help them return to work, but PDI policies may focus more on early provision of services and, depending on the policy, earlier intervention and case management. SSDI program rules allow beneficiaries access to return-to-work services and supports through the Ticket to Work (TTW) program, which helps interested beneficiaries transition to self-sufficiency through work. When individuals become eligible for SSDI, SSA guidance calls for sending them information about public or private employment networks or state vocational rehabilitation agencies. According to SSA’s guidance, beneficiaries can choose to work with one of these service providers and develop a plan for work goals that may involve services such as training, career counseling, vocational rehabilitation, and job placement. The TTW program then pays for those services and ensures that participating beneficiaries will not be subject to a review of their disability while they continue to work with the service provider. However, the SSA Office of the Inspector General reported that fewer than 3 percent of beneficiaries were participating in TTW in 2015. In addition, SSA-funded evaluations have found that TTW has had limited success in returning SSA beneficiaries to work and reducing their dependence on SSDI.

In addition to return-to-work services through TTW, SSA officials told us that beneficiaries may use services provided through or by other federal, state, and local programs or provider networks, such as the Department of Labor’s Stay-at-Work/Return-to-Work initiative. However, we have previously reported that the large number of federal agencies and programs providing employment supports to individuals with disabilities represents a fragmented system of services, and little is known about their effectiveness.

In contrast, according to insurance representatives and the three PDI policies we reviewed, PDI policies may provide early interventions, funding for workplace accommodations, and case management to help beneficiaries return to work. For example, one policy we reviewed explicitly offered an early intervention program to covered employees even when the PDI insurer was not also the short-term disability insurer, to identify workers who might benefit from vocational analyses and rehabilitation services before they are eligible for long-term disability benefits. Separately, this policy also had a return-to-work program with case managers who coordinate services and refer beneficiaries to clinical specialists, such as nurse consultants, psychiatric clinical specialists or vocational rehabilitation consultants. According to this policy, if the insurer determined that beneficiaries were capable of participating in the return- to-work program, but did not, their benefits could cease.

Information on how many PDI beneficiaries receive work assistance, such as worksite modifications, and insurers’ aggregate expenditures for such assistance is also generally unknown. While participation in and the impact of SSA’s TTW program has been extensively evaluated, the insurance representatives and researchers with whom we spoke could not provide us with data or studies showing the extent or cost of work assistance provided by PDI insurers, so the impact of these investments is not publicly known. See Table 3 for a comparison of SSDI and PDI policies’ work incentives and assistance.

Implications of Proposals to Expand Private Disability Insurance Cannot Be Assessed Due to Incomplete Information

Our literature review identified three distinct proposals to expand PDI— through some type of federal action—as a way to provide savings for SSDI; however, we were unable to assess the implications of these proposals on SSDI. Based on our review, there is an array of complex factors that could influence PDI expansion and SSDI cost savings— factors for which data, methods, and assumptions for projecting SSDI savings are either unreliable and unsupported, or unavailable. In addition, insurer, employer, and employee stakeholders we spoke with identified other implications of expanding PDI—but these implications cannot be ascertained because the proposals are not sufficiently detailed.

PDI Expansion Proposals Foresee Savings

The three distinct PDI expansion proposals we identified include the following:

David Babbel and Mark Meyer (Babbel and Meyer) of Charles River Associates proposed that voluntary employer-sponsored PDI coverage could be extended to more working Americans through congressional action and the federal government facilitating education and outreach efforts. Specifically, they recommended the enactment of legislation to make it clear to employers that automatic enrollment with “opt-out” arrangements under employer-sponsored group disability plans is legal. The authors believe this will address confusion and uncertainty that is holding employers back from providing PDI.

Rachel Greszler (Greszler) of The Heritage Foundation proposed encouraging employers to voluntarily provide PDI in exchange for a payroll tax credit. Under this proposal, participating employers would qualify for the tax credit by covering the first 2 or 3 years of PDI benefits at least equivalent to SSDI benefits to employees. Workers awarded benefits under the employers’ PDI would transfer to the SSDI program if their disability continued beyond the first 2 or 3 years and they qualified for SSDI. PDI would then cease to provide benefits, unless employers chose to extend the PDI policies. According to the author, if an individual is denied PDI benefits, the individual could apply for SSDI.

David Autor and Mark Duggan (Autor and Duggan) proposed extending coverage of PDI to all workers through a statutory mandate. Employers would be required to provide PDI benefits for 2 years to individuals with disabilities who are unable to work. At the end of this period, PDI benefits would cease and SSDI would provide benefits for individuals qualifying for SSDI. Under the proposal, individuals with extremely disabling conditions with very limited prospects of returning to work (e.g. stroke, late stages of certain cancers, etc.) would be eligible to apply for SSDI at the onset of their disability, in lieu of PDI.

Table 4 summarizes key features of the three proposals to expand PDI that we identified.

Many Unknowns Make An Assessment of the Potential for SSDI Savings Uncertain Differences in Covered Populations

Existing differences in the SSDI and PDI covered populations may play a role in determining the potential impacts of expanding PDI. As previously noted, SSDI covers almost all workers, whereas PDI coverage tended to be for those with higher wages and was more prevalent in certain industries. Based on our review of BLS data, in order to expand significantly, PDI would need to cover more lower-wage workers and other occupations and industries where it is currently less common, such as in retail and construction. However, as indicated in the Autor and Duggan proposal, expanding PDI to workers currently not covered could affect PDI premiums, based on the type of industry and wage levels. According to various stakeholder groups we interviewed, changes in PDI premiums would, in turn, have implications for the attractiveness of PDI to employers and employees under voluntary proposals.

The overlap in PDI with the SSDI beneficiary population also plays a role in determining any potential impact of expanding PDI. As previously noted, one industry survey reported that 72 percent of PDI beneficiaries of its member companies also received SSDI. One insurer told us that the longer PDI beneficiaries remain on PDI, the more likely they will also receive SSDI. In fact, for beneficiaries on PDI for 2 years, 58 percent also get SSDI benefits; and for beneficiaries on PDI for more than 5 years, more than 90 percent also receive SSDI. Our review of these data suggests that for those receiving both SSDI and PDI benefits, it may be difficult to attribute return to work and other changes in circumstances, such as changes in health, to either PDI or SSDI. For example, it is possible that any differences in return-to-work outcomes for SSDI beneficiaries who receive PDI versus those who do not may have more to do with the specific characteristics and circumstances of the beneficiaries than as a result of having PDI coverage.

Types and Timing of Return-to- Work Assistance Offered

To achieve SSDI cost savings, the three proposals assume that insurers will provide or reimburse employers for providing vocational rehabilitation, workplace accommodation, and return-to-work services, but the proposals provide few, if any details about how this would occur. For example, the two proposals that describe voluntary PDI enrollment do not explicitly require that such services be provided through PDI. The Autor and Duggan proposal, which includes a mandate for enrollment, requires that PDI provide workplace accommodations consistent with the Americans with Disabilities Act (ADA) and vocational rehabilitation services. The proposal includes a list of vocational rehabilitation services that insurers could provide, but the authors acknowledge that in practice it is not always “clear-cut” when a “reasonable accommodation” under the ADA is required and what the accommodation should be. As noted previously, we were unable to find public data on the extent to which PDI policies currently provide such services and insurance representatives and researchers we contacted that collect and report PDI data said that they do not collect such data from insurance companies. According to our review of PDI policy provisions that allow for rehabilitation and workplace accommodation services, the decision of what assistance will be provided through the PDI policy, if any, and the extent of such assistance the insurer provides or helps the employer provide, is at the discretion of the insurer. It is also possible that insurers would make less of an investment in return-to-work services for PDI beneficiaries under the two time-limited proposals because the insurers are only responsible for 2 to 3 years of disability payments, compared to traditional PDI policies where the employer may have financial responsibility to make payments to beneficiaries until they reach retirement age, unless insurers can help them return to work.

Several stakeholders said that additional uncertainty exists with respect to effectiveness or attractiveness of PDI expansion proposals for populations currently not covered by PDI, such as low-wage workers and those with physically demanding jobs. BLS data show that PDI is currently less prevalent among these workers, and therefore less is known about the type and effectiveness of return-to-work services that would be offered to them under PDI expansion. For example, researchers report that lower-wage workers may have jobs that offer limited opportunities to adjust work schedules—a flexibility that one research group said could assist workers in the case of disability. In addition, researchers stated that lower paying jobs tend to not offer sick leave and other key benefits, and the absence of such benefits may present another potential obstacle for successful rehabilitation and workplace accommodation efforts. According to various stakeholder groups we interviewed, employers in low-paying industries or who otherwise do not offer these benefits would have less of an incentive to offer PDI or other supports to help retain their workers compared to employers who compete for skilled employees that are also typically more difficult to replace. These factors—in combination with previously discussed unknowns related to the cost of PDI in non-traditional sectors— reflect complexity and uncertainty about the extent to which PDI may be expanded through a voluntary system.

The proposals assert that expanded PDI would provide financial support, accommodations, and rehabilitation services much sooner than SSDI. However, based on our review, it is not clear if this would happen for two of the proposals. As previously noted, the SSDI elimination period is 5 months, after which SSDI beneficiaries become eligible for return-to-work assistance through the TTW program and financial incentives, but lengthy SSA decision times may significantly delay when individuals receive return-to-work supports. The Autor and Duggan mandatory proposal has PDI benefits commencing within 3 months of disability onset, which is sooner than SSDI, and therefore, depending on the circumstances, may allow for the provision of return-to-work services sooner than under SSDI. The Babbel and Meyer and Greszler voluntary proposals do not specify the length of elimination periods. While the Babbel and Meyer and Greszler proposals indicate PDI will provide return-to-work services sooner than SSDI, it is unclear whether or how the timing of return-to- work services might evolve under the two voluntary proposals. Moreover, while data exist on SSDI initial and appeal decision times, we were unable to find current industry-wide data on the average decision period for PDI, or on the extent of appeals and how long on average these take to decide.

Other Factors That Could Affect PDI Enrollment and SSDI Cost Savings

Based on our review of the PDI expansion proposals and interviews with stakeholder groups, we identified several additional factors that could affect the extent to which the PDI proposals could increase PDI coverage and result in SSDI cost savings, especially under the two voluntary proposals (Babbel and Meyer and Greszler). Such factors include the likelihood that efforts to encourage PDI enrollment might be successful, the effect of policy premiums and tax credits on employers’ willingness to offer PDI policies, and whether expanded PDI might lead to more people also going on to SSDI.

Babbel and Meyer asserted that congressional action and federal outreach would clarify for employers that automatic enrollment with opt- out arrangements is legally permissible and thereby result in voluntary PDI expansion. According to the authors, their approach was motivated by the success of similar automatic enrollment provisions in the Pension Protection Act of 2006 in raising the participation and savings rates in 401(k) defined contribution savings programs. However, since PDI automatic enrollment is already available, it is not clear how their proposal for congressional action and federal outreach would result in more employers adopting it and employees participating. The Babbel and Meyer proposal is also based on requiring employees to pay part or all of the insurance premiums. According to employee advocacy groups, workers at the lowest end of the wage spectrum in particular may have little, if any, disposable income to pay for PDI, and also little incentive to participate when SSDI already replaces a relatively high proportion of their wages. Further, in an employer discussion session we heard that employees willing to contribute in part or the entire premium may also have a greater risk of needing PDI benefits, and adverse selection could result in higher premiums, which in turn, fewer workers may be willing to pay.

The Greszler proposal anticipates potential significant savings for SSDI assuming that employers who had not previously offered PDI to their employees would opt to offer PDI in exchange for a payroll tax credit. According to an employer association, in making this choice, employers would need to compare the financial benefit of a payroll tax credit with the cost of PDI premiums, among other things—which may evolve under the proposal, according to insurers in a discussion group we held. According to insurance industry representatives, the direction of possible premium changes under the Greszler proposal is unclear because the proposal reduces employers’ financial responsibility to 2 to 3 years of potential disability benefit costs. This shorter benefit period could reduce premiums typical for longer term policies. However, since persons would not generally be able to receive SSDI benefits during this period under the proposal, there would be no offset of SSDI benefits against PDI benefits (as discussed earlier). According to an industry association and an insurer discussion group we held, the absence of the SSDI offset could increase premiums, possibly substantially.

Another consideration raised by SSA officials is whether PDI expansion would increase SSDI applications and benefits paid, which would reduce potential SSDI savings from the proposals and could increase the cost of the SSDI program. Typical PDI policies may effectively require PDI beneficiaries to apply for SSDI, and PDI insurers may assist beneficiaries with SSDI applications. Insurance association representatives told us that in addition to helping keep PDI premiums attractively low, such practices benefit those who become eligible for SSDI benefits by providing health care benefits that they might not otherwise be able to access. One insurance association further noted that by helping PDI beneficiaries complete SSDI applications, SSA may receive well- supported applications that are more efficient to process. On the other hand, researchers and SSA officials indicated that such PDI practices may result in some individuals applying for and receiving SSDI who would not have otherwise done so.

Cost Saving Estimates Are Unreliable or Unsupported

Each proposal states that expanding PDI would reduce SSDI costs. The proposals indicate that this would be achieved mainly through PDI early intervention after employees’ onset of disabilities and a resulting reduction in the number of SSDI claimants or duration of SSDI beneficiaries’ status. Only the Babbel and Meyer proposal developed an estimate of potential savings. In forecasting SSDI savings,

The Babbel and Meyer proposal estimated cost savings by assuming that automatic enrollment would result in PDI coverage increasing from 33 percent to just over 50 percent of private sector employees. Comparing PDI disability termination rates from the Society of Actuaries with SSDI termination rates, Babbel and Meyer estimated that PDI expansion would save the federal government an additional $500 million to $700 million per year, with a 10-year cumulative savings of $5 billion to $7 billion. They said that because they were unable to conduct a rigorous and comprehensive study of disability, recovery, and reemployment, their proposal “quantifies the benefits of group disability insurance indirectly, using publicly available data that are sparse, aggregated, and often difficult to interpret.”

The Greszler proposal relied on the Babbel and Meyer analysis in concluding that there would be significant SSDI savings. According to Greszler, early intervention would keep individuals on the job and reduce the number of potential SSDI beneficiaries. Further, Greszler assumes that the loss of tax revenue from the proposed payroll tax credit would be made up by lower SSDI expenditures incurred during the 2 – 3 years that employees are covered by PDI instead of SSDI.

However, the Greszler proposal did not quantify the magnitude of the tax credit or the overall savings to SSDI.

The Autor and Dugan proposal noted that SSDI expenditures would be lower because mandated PDI policies would pay the first 2 years of benefits, instead of SSDI. The authors also noted that, over the longer-term, 2-year mandated PDI for employees has the potential to pay for itself and generate SSDI savings if the proposed mandate succeeds in allowing 1 in 11 would-be SSDI beneficiaries to remain gainfully employed. However, Autor and Duggan’s proposal did not include an explanation of how, or data or evidence supporting that, the proposed PDI mandate would achieve employment for 1 in 11 would-be SSDI beneficiaries.

Our analysis of the Babbel and Meyer proposal found that the available data used to develop the SSDI cost savings estimates due to PDI expansion were not comparable and therefore did not result in a reliable estimate of the financial impact of current or expanded PDI on SSDI. In their proposal, Babbel and Meyer estimated cost savings by comparing SSDI’s and PDI’s recovery rates. For SSDI, Babbel and Meyer used an SSDI work termination rate that includes the number of SSDI beneficiaries terminated during the year due to having earnings that exceeded the substantial gainful activity amount, divided by the total number of SSDI beneficiaries during the year. For PDI, Babbel and Meyer used a PDI recovery rate that includes the number of PDI benefit awards terminated during the year for multiple reasons, divided by the cumulative number of months all PDI benefits were received by PDI beneficiaries who received PDI benefits during the year.

However, we found that the numerators and denominators used to compare SSDI and PDI recovery rates are not comparable. For example, the PDI numerator reflects a much broader definition of recovery than the SSDI numerator, which may contribute to overestimating PDI’s relative recovery rate. Specifically, the SSDI numerator is limited to those terminated from SSDI for earnings exceeding SGA, whereas the PDI numerator includes terminations for reasons besides return to work, such as medical improvement (even if an individual did not return to work), failure to submit required documents to continue receiving benefits, changes in coverage from inability to perform own occupation to any occupation coverage, and other non-specified terminations. The denominator used in the comparison also differs. For SSDI, it is the number of people receiving SSDI benefits during the year. For PDI, it is the cumulative number of months of all PDI benefits that were received by PDI beneficiaries who received PDI benefits during the year. Because the denominators are different, we were unable to determine whether they contributed to an under- or overestimate of PDI’s relative recovery rate. Regardless, we determined that the non-comparable rates in Babbel and Meyer’s proposal affect the reliability of its cost savings estimate. SSA’s Office of the Chief Actuary also reviewed the proposal at our request and concluded that the SSDI and PDI termination rates shown in the proposal were comparable neither in concept nor in unit of analysis. Even with common units of analysis in SSDI and PDI termination rates, estimates of the impact of PDI on SSDI would also need to consider the other differences that we described above, such as differences in covered populations.

Authors Suggested Proposals Be Pilot Tested

The authors of two proposals we spoke to suggested that any proposal to expand PDI should be pilot tested before being implemented nationwide due to the number and complexity of factors involved and their potential effect on SSDI. For example, in their proposal, Autor and Duggan noted that, given the inevitable challenges and uncertainties associated with rolling out a major program innovation, it would be desirable to phase in such a plan and to run pilot programs in a limited number of states. They also suggested that pilot programs could be targeted, such as to larger firms. In discussing the Greszler proposal with the author, she told us that a pilot test of her proposal might help show if the program works better in some industries or occupations than others, as well as determine how employers respond to the tax incentive and if employees feel they are treated fairly by private insurers.

Similarly, we have previously reported that changes affecting the SSDI program may raise particular implementation challenges, given the program’s inherent complexity; any changes may require pilot testing to evaluate the potential effects or unintended consequences that the Congress, the administration, SSA, and the broader public will need to know to make an informed decision about whether to implement program changes nationwide. SSA and DOL have funded and overseen pilot programs to test other proposals to help individuals with disabilities participate in the workforce.

Missing Details Make Identifying the Implications of the Proposals for Stakeholders Uncertain

Employee advocacy groups, employers, and insurance companies we spoke with raised various questions and concerns about the potential impacts of expanding PDI—implications that the proposals did not explicitly or fully address and therefore remain uncertain. The proposals also provided few details on any oversight role that would be needed by federal or state governments.

Potential Impacts on Employees

The proposals assert that employees could potentially benefit in the event of a disability from PDI cash benefits that may be higher than SSDI benefits; however this outcome is not certain. Based on our review of SSDI and PDI policies and interviews with employee and advocacy groups, whether or not workers would opt for PDI benefits under voluntary expansion would depend on the attractiveness of PDI relative to SSDI and other benefits. For example, an employee benefits survey and several stakeholder groups we spoke with suggested that employees tend to value other benefits, such as health insurance, more than disability insurance. According to employee groups, lower-wage workers, in particular, may opt-out of PDI under the Babbel and Meyer proposal in favor of paying for other benefits, or forgo benefits entirely, especially if premiums are high. In addition, based on our review, PDI may not provide much additional benefit for lower-wage workers, and employee groups told us that, given a choice, lower-wage workers might choose not to participate in PDI since SSDI benefits replace a relatively high share of their wages. Based on our review of SSDI and PDI policies, current PDI policies typically do not include dependent and spousal benefits offered by SSDI, and unlike SSDI have exclusions and pre-existing condition provisions, as well as have time limits on benefit payments for some conditions, which may result in workers finding SSDI more attractive than PDI. To the extent that employees see PDI benefits as less attractive than SSDI and their willingness to participate in PDI declines, cost savings to SSDI resulting from voluntary PDI proposals would likely be affected.

Two employee advocacy groups also expressed concern that all three proposals focus on employer-provided PDI, and two of three proposals do not explicitly address self-employed and part-time workers. As we have previously noted, an increasing number of people are part of the contingent workforce, with limited access to employer-sponsored benefits. Other individuals may have already left the workforce or otherwise be unemployed and thus have no connection to an employer. Further, two employee advocacy groups explained that individuals who will eventually be unable to work due to a disability initially experience symptoms that may cause them to work part-time or take a different position or job, which may affect their access to PDI through their current or new employer. On the other hand, the proposals allow for persons not covered under the proposals to apply for SSDI.

Two employee advocacy groups also expressed concern that workers who are auto-enrolled under the Babbel and Meyer proposal may not make an informed choice about participating due to the complexity of disability contracts. One employee advocacy group was particularly concerned for low-wage workers who may be struggling financially and cannot afford disability insurance, but do not initially opt-out of coverage because of inertia, language barriers, or not understanding the product, including the tradeoffs involved in choosing to keep it or opt out.

Employee advocacy groups told us that more needs to be done to get SSDI beneficiaries back to work, but noted a range of concerns about using PDI to do this. Their concerns included the following:

Employers are moving away from providing other key employee benefits, such as health care benefits (which may be more important to workers than PDI and without which PDI would be less effective).

Employers are moving away from full-time employment (which is usually a stipulation of PDI policies).

Employers might discriminate in not hiring individuals at higher risk of disability under proposals that make employers responsible for the first few years of providing disability assistance.

The transition from receiving PDI to qualifying and getting approved for SSDI under the proposals might delay receipt of SSDI.

Insurers might not actually provide rehabilitative and accommodation services.

There would not be standardization of PDI eligibility determination, coverage, and appeal processes to ensure fair and equitable treatment of workers.

All employee advocacy groups we spoke to emphasized the need for consumer protections and strong oversight under the PDI proposals. One employee advocacy group said that there are too many problems, gaps, and concerns with the proposals to expand PDI, when SSDI already provides near universal coverage and is a system that is up and running. Moreover, the employee advocacy group said that SSA could identify the key reasons that PDI has had success in getting people back to work and incorporate those lessons into SSDI, because more effort needs to be spent improving SSDI and increasing its return-to-work efforts.

Potential Impact on Employers

Individual employers and employer associations we spoke to said that more details would be needed to determine how they might be impacted by the proposals.

Regarding the Babel and Meyer proposal (which as previously discussed, cites the need for congressional action to address potential legal uncertainties regarding automatic enrollment) one employer association representative expressed concern about whether state garnishment laws would prohibit employers from making automatic deductions for PDI premiums from employees’ pay without their permission.

Regarding the Greszler proposal, employers and representatives of an employer association we spoke to indicated they would need to know more details, such as the exact amount of the tax credits and how insurance premiums might be affected.

Regarding the Autor and Duggan proposal, representatives of the two employer associations stated that their members would oppose a mandate. One employer association said there are often additional requirements that come along with any mandates, even for actions that employers are already taking, such as offering PDI. The employer association also expressed concern that doing more than is required under any mandate generally exposes employers to liability, which could result in employers providing only the minimum benefits and assistance required by law. One employer said that mandated PDI could crowd out the amount of other benefits an employer is willing to provide, such as the amount of medical coverage that it offers to employees.

In addition, one employer association we spoke with was concerned about the potential administrative burdens associated with expanding PDI, particularly for small employers. They noted that administering any benefit requires financial resources to provide, monitor, and maintain the benefit, stating that once employers provide a benefit to employees, they are generally reluctant to take it away. Employers in one discussion group we held were also concerned that providing disability assistance through a PDI policy for 2 to 3 years under two of the proposals would require that they retain employees and provide benefits even when employees are unable to continue work. Employers in a discussion group and an employer association we spoke to also wanted to know how the PDI plans would be overseen at the state and federal levels under the proposals, and what additional requirements that would entail.

Potential Impact on Insurance Companies

Insurance companies and associations we spoke to generally supported efforts to expand PDI, but also expressed some concerns about related unknowns. In particular, insurers in one of our discussion groups and both insurance associations we spoke with supported the Babbel and Meyer proposal to encourage employers to automatically enroll employees, with an opt-out provision, which came out of a study funded by America’s Health Insurance Plans (AHIP) and the American Council of Life Insurers (ACLI). One insurance association said that, relative to the other proposals that provide a tax credit or mandate coverage, the Babbel and Meyer proposal to expand PDI would not be a problem for insurers’ capacity. Representatives from this insurance association suggested first taking initial steps proposed by Babbel and Meyer through encouraging automatic enrollment before considering a more major restructuring of PDI that would supplant SSDI for 2 to 3 years. On the other hand, two insurance associations expressed concerns about the potential for additional requirements that could result from implementing the Babbel and Meyer proposal, for example in relation to employee consent or the quality of coverage offered.

Insurance associations and insurers we spoke with also raised concerns about the other two proposals (Autor and Duggan, and Greszler), especially related to how they would fundamentally and unpredictably change the PDI market. On the one hand, one insurance association pointed out that these proposals would eliminate the SSDI offset from PDI payments for the 2 to 3 year period, which could lead insurance companies to significantly increase PDI premiums for such policies. On the other hand, if the insurance company is only liable for 2-3 years of benefit payments and services, this could reduce insurers’ costs.

In addition, in one insurer discussion group that we held, insurers said that if there was not an SSDI offset of PDI benefits during the 2 to 3 year period, the industry would be more aggressive about return to work efforts. However, in another insurer discussion group we heard that they would do less for return to work under such policies, because future savings to the insurance company are not as great under a 2 to 3 year policy as if the insurance company is liable for paying benefits until an individual reaches normal SSA retirement age, as with current policies. Finally, representatives from one insurance association said that the Greszler and Autor and Duggan proposed PDI expansions would create extreme capacity problems for insurers. Under the Autor and Duggan proposal nearly all employees would need to be covered.

One insurance association also noted its view that SSDI might benefit under the proposals to expand PDI. Specifically, the insurance association said that after someone goes through the PDI claim process, a subsequent claim for SSDI may be of higher quality, potentially reducing the administrative costs of a subsequent SSDI determination.

Potential Impact on Federal and State Governments Oversight

The three proposals we reviewed did not specify the government’s role in overseeing the expanded PDI market. Babbel and Meyer proposed a stronger federal role in encouraging automatic enrollment by passing a law to clarify its permissibility, but the proposal did not provide details on implementation and oversight. Greszler proposed that participating employers provide benefits at least equivalent to SSDI benefits, but provided no other details on how compliance would be overseen. Neither the Autor and Duggan nor the Greszler proposals addressed whether individuals denied PDI could apply for SSDI within the 2 to 3 year period covered by their proposals.

Stakeholders we spoke to expressed divergent perspectives on whether federal and state governments would need to provide additional regulation, supervision, and/or oversight related to expanded PDI markets. One insurance association said that insurance providers are already very well regulated by ERISA and by states, and a major insurer said that there already exists an array of federal and state laws governing employer-sponsored PDI coverage that establishes a robust regulatory framework for protecting participants. In contrast, representatives from all employee advocacy groups we spoke with cited problems identified with private insurance company practices and stressed the need for additional consumer protections and government oversight. We found instances of federal and state enforcement actions regarding disability insurance improper practices in the past potentially affecting hundreds of thousands of people over many years, as well as more recent rulemaking by DOL that said that “disability cases dominate the ERISA litigation landscape.” These actions suggest that expanding PDI or including new PDI requirements, in lieu of SSDI, would likely involve some degree of additional federal and state oversight.

Any costs associated with expanded state and federal roles would reduce potential cost savings from the proposals, although the extent to which this might affect the Disability Insurance Trust Fund is unclear. According to DOL officials, an expansion in the number of private disability benefit plans and an increase in the complexity in the legal requirements governing the design and operation of such plans would require DOL to provide proportionally more interpretive guidance, compliance assistance, and enforcement and oversight activities. Estimating the potential impact of the proposals on DOL’s functions and capabilities would require more specific information on the statutory and regulatory changes envisioned by the proposals and the likely impact of those changes on the private disability plan marketplace. SSA officials said that whether or not SSA would experience an expanded role would depend on any changes in law regarding the proposals.

Agency Comments

We provided a draft of this report for review and comment to SSA and DOL. Neither SSA nor DOL provided written comments, although both provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees, the Commissioner of Social Security, Secretary of Labor, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-7215 or curdae@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I.

Appendix I: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, key contributors to this report included Michele Grgich (Assistant Director), Dan Meyer (Analyst-in- Charge), Lucas Alvarez, and Seyda Wentworth. Other contributors include: James Bennett, Ramona Burton, Holly Dye, Sarah Gilliland, Emei Li, Dan Meyer, Carol Petersen, Monica Savoy, Almeta Spencer, and Adam Wendel.