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Proposal to reform SSDI based on private disability insurance, belief that new health-care law will stand

As promised, we are tracking developments about proposals to streamline or otherwise improve the SSDI/SSI system. The joint report from the Brookings Institution’s Hamilton Project and the Center for American Progress referenced in a previous post was released earlier this month. The authors, David H. Autor and Mark Duggan, are professors of economics, Autor at the Massachusetts Institute of Technology and Duggan at the University of Maryland. Both are research associates for the National Bureau of Economic Research (the outfit charged with pronouncing the official beginnings and endings of recessions).

'Twin problems' for SSDI

A Dec. 17 piece at Investors.com describes the 48-page report as a proposal aimed at "reforming SSDI to solve its twin problems of impending fiscal shortfalls and poor employment incentives." The SSDI program has been projected to be in the red by 2018. From the report:
Due to its rapid growth, SSDI has come to encompass an ever-larger share of the Social Security system budget. In 1989, approximately one in ten Social Security dollars was spent on SSDI. By 2009, this number had risen to almost one in five Social Security dollars (18 percent), as shown in Figure 3. SSDI expenditures currently exceed the payroll tax revenue the program collects, and analysts project that the SSDI trust fund will be exhausted in 2018, twenty-two years ahead of the trust fund for Social Security retirement (the so-called Old-Age and Survivors Insurance, or OASI). The rapid expansion of SSDI contributes significantly to the deteriorating financial health of the overall Social Security system since both depend on the Social Security payroll tax.

A new 'front end,' using private disability insurance

Autor's and Duggan's idea, says the Investors.com piece, is to create "a new 'front-end' universal program of private disability insurance (PDI) paid for out of a new payroll tax to be shared by employers and employees. PDI would provide employment supports to disabled workers with a view of keeping them on the job. It would also provide new subsidies to employers to retain disabled workers on the job. "Under their reform, applications to SSDI by those with disabilities but who could continue working with assistive technologies would be statutorily delayed by 22 months, during which time they would continue to receive PDI's employment supports."

Borrowing from unemployment and workers' comp programs

Part of the idea is to model a new approach based on workers' compensation and unemployment benefits programs. From the report:
Our proposal envisions extending PDI coverage to the vast majority of U.S. workers, in much the same way that UI and WC benefits are universally provided to workers who participate substantially in the labor market. PDI coverage under our proposal would form the first line of defense in the U.S. worker disability system. Its primary goal would be supporting work. Thus, in contrast to the traditional SSDI system—but similar to the PDI plans numerous employers purchase—it would treat disability and gainful employment as potentially compatible conditions rather than mutually exclusive states. The proposed policy would support workers from 90 days to 2.25 years following onset of disability, providing partial income replacement and supports geared toward helping individuals maximize work readiness and self-sufficiency. After receiving PDI benefits for twenty-four months, individuals who are unable to engage in substantial gainful employment would transition into the SSDI system. The screening criteria for SSDI would be unchanged. It is instructive to consider the average amount paid for private long-term disability coverage in the market at present. Using data from the Bureau of Labor Statistics on the average hourly cost of PDI coverage ($0.04) and the fraction of workers with long-term disability coverage (32 percent), we estimate that the average policy costs approximately $250 per year—about $20 per month. This is likely an upper bound on the average cost of policies under our proposal, as current PDI policies are, on average, significantly more generous than the one we propose. For example, the median maximum monthly benefit of these policies is $7,500, which is three times greater than the corresponding maximum in our plan. Additionally, our proposed coverage would pay benefits for a maximum of just two years, while existing policies are typically long-term and may provide at least partial benefits to the worker until he or she reaches full retirement age.

Questions to be answered

Of course, the plan is not without hurdles. For one, enough variations exist among the various states' workers' compensation systems that finding a single "role model" to copy is unlikely. For example, Texas doesn't even require employers to carry workers' compensation insurance. On the other hand, according to the report, five "U.S. states already mandate that employers provide temporary disability insurance to their workers.  Although little studied, the available data on these mandates suggest that they have not substantially hindered labor market operation but have provided valuable insurance to workers." Furthermore, a program similar to that one proposed already has been seen some success in the Netherlands. Another rough spot may be persuading employees to go along with paying for a share of a program that does not provide for medical care, which the authors view as unnecessary because of the passage of "Obamacare."  According to the report: "Alongside lost income, medical care is one of the most costly aspects of disability. Private-sector disability policies do not pay for medical care. Instead, they serve to partially insure lost earnings as well as reimburse workplace accommodations and certain rehabilitation services that a traditional health insurance plan would not cover. Our proposed PDI coverage likewise would not cover medical care. Such coverage is unnecessary because health insurance is slated to become nearly universal and much more affordable for American workers over the next several years as a result of the recently enacted Patient Protection and Affordable Care Act." However, several states have filed suit against health care law, and a federal judge recently ruled a portion of the law unconstitutional, and many observers expect the final word on the law will come only with a ruling from the U.S. Supreme Court.