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The Dwindling Disability Trust

With the government's disability insurance fund headed for exhaustion, is it time to "go Dutch" between employers and the federal government?

Sunday, September 16, 2012
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Some of the nation's top disability insurance researchers think they have a way to ease the burden on the soon-to-be-depleted Social Security Disability Insurance Trust Fund: have employers bear more of the costs borne by the fund as workers draw more benefits.

But the nation's employers, who already contribute to the fund through payroll taxes, may already have an answer: No thanks.

With many employers paying higher insurance premiums to providers, in turn raising employee premiums for group health plans -- and even debating whether to keep offering group benefits as a tool for attracting talent, considering the inexorable premium increases -- suddenly paying more for disability insurance isn't what many have in mind.

"With healthcare, I don't think employers want any more on their plate," says Marcia Carruthers, CEO of the Disability Management Employer Coalition, a San Diego-based employer-funded organization created to advance the management of disability and workforce productivity.

Instead, Carruthers says, the SSDI needs to do a better job of managing its claims and getting people back to work.

Lawmakers aren't proposing to privatize the SSDI Trust Fund just yet, and there doesn't appear to be enough support in Congress for such a plan. (When former President George W. Bush proposed private accounts to fund Social Security in 2005, he couldn't muster enough backing, even from his own party.)

So, for the moment, there's no danger of the nation's SSDI Trust Fund being turned over to the private sector. Fund managers also have options such as changing eligibility requirements.

Still, there is a real danger that the fund is going to run out of money and, sooner or later, lawmakers are going to be forced to come up with a solution. Even in the best case, the fund is projected to be exhausted in 2016, two years earlier than last year's estimate, according to the latest annual report released in April by the Social Security Board of Trustees.

It's not a pretty picture. The fund's top administrator, Commissioner Michael J. Astrue, admits as much. In the April annual report, he called the situation "troubling."

Not that government statisticians, disability insurance experts and employers are surprised by the latest findings. Actuarial analyses have pointed in that direction since 2005, when Disability Insurance Trust Fund disbursements started to exceed income raised from payroll taxes.

More Disabilities, Fewer Funds

That situation coming to roost, combined with a soft economy, is beginning to take a toll on the SSDI Trust Fund, which has seen a big jump in the number of people receiving disability payments even as the nation, as a whole, lives longer.

In 2011, the U.S. government disbursed $128.9 billion in insurance-benefit payments, up 3.8 percent from 2010, to 10.6 million disabled workers, the Social Security trustees reported in April.

Over the five-year period, from 2007 to 2011, benefits paid by the Disability Insurance Trust Fund to disabled workers and their families soared from $95.9 billion in 2007 to $128.9 billion last year, an increase of more than 34 percent, according to the trustees' report.

Meanwhile, total assets in the fund at the end of 2011 dwindled to $153.9 billion from $214.9 billion in 2007, the trustees also reported. Payroll tax contributions slipped to $81.9 billion in 2011, down from $95.2 billion four years earlier.

In 2010, according to noted disability insurance expert Professor David H. Autor, associate department head of the Massachusetts Institute of Technology Department of Economics, SSDI cash-transfer payments totaled $124 billion, while the cost of Medicare for SSDI beneficiaries was $59 billion.

Those combined outlays -- exceeding the equivalent of $1,500 for every U.S. household -- were equal to 7.3 percent of federal nondefense spending in 2010. It is an unsustainable rate, Autor says.

Bill Bossi, a founder and partner at Disability Insurance Specialists in Bloomfield, Conn., says the nation's SSDI Trust Fund was "getting hammered" because of both higher claims frequency and severity.

Disability insurance experts also point to the gradual liberalization of the eligibility criteria as a reason the fund is headed toward insolvency. Millions of baby boomers crossing the 50-year-old threshold means new lives entering the period with the highest prevalence of disability, the trustees' report says.

In addition, the proportion of disabled beneficiaries who no longer draw upon the trust fund because of their recovery has been relatively low, according to the report.

That means that, once people collect a disability check from the fund, they rarely leave the disability rolls, a fact long known to disability insurance experts. "The return-to-work rate is less than 1 percent for people who go out on SSDI," Carruthers says.

The weak economy, with unemployment north of 8 percent every month so far this year, isn't helping, either. "The probability of being disabled tracks unemployment rates," says Richard J. Fuerstenberg, a senior partner in the Princeton, N.J., office of Mercer's health and benefits business.

When companies announced layoffs six or even 12 months before employees were pushed out the door for good, Fuerstenberg says, they had enough time to get back on their feet without necessarily having to rely on disability insurance.

Today, that's no longer the case.

Like Carruthers, Fuerstenberg says companies would not take kindly to any government attempts to increase private-sector contributions to the SSDI pool because they are already bracing for rate increases by insurance companies to their private long-term disability plans.

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"Some employers may even say, 'I'll get rid of my long-term disability plan [if I'm forced to pay even more],' " says Fuerstenberg.

Possible Incentives, Fixes

With disability payments from the Disability Insurance Trust Fund skyrocketing, it's only a matter of time before Congress must find a way to slow down the growth of these payments.

The fund suffers from misplaced incentives, according to SSDI critics, and even discourages injured workers from re-entering the workforce.

"The imminent exhaustion of the SSDI Trust Fund provides an urgent need and, perhaps, a rare opportunity for exploring innovative solutions to the long-standing policy challenge posed by the SSDI program," MIT's Autor writes in a report titled The Unsustainable Rise of the Disability Rolls in the United States: Causes, Consequences, and Policy Options.

What to do? Lawmakers could increase the payroll tax, reduce benefits, tighten eligibility requirements or look for new sources of revenue, according to the trustees' report Could new sources be private-sector employers, one might ask?

Reforms could include experience-rating the Social Security Disability Insurance payroll tax, for example. Experience-rating -- a method used by insurers to determine pricing of premiums for different groups or individuals based on the group or individual's history of claims -- has been used for decades by state unemployment insurance and workers' compensation systems, so why not apply that to the federal disability insurance program?

Because employers now pay a flat-rate 1.8 percent payroll tax on covered earnings, split between employer and employee, there's no incentive for employers to minimize disability insurance claims as there is with private long-term disability carriers.

Disability insurance-reform experts have also proposed a mix of SSDI insurance policies to pay for rehabilitation and partial income replacement for disabled workers, and financial incentives to encourage employers to keep workers on the payroll and avoid workers collecting disability checks in the first place.

Before saying "no" to more private-sector involvement, employers might want to consider the disability insurance model, adopted by the Netherlands a decade ago, that relies on employers bearing more of the cost of the disability insurance system through a "gatekeeper protocol."

The program requires the employer, worker and a consulting physician to draft a return-to-work plan within eight weeks of a disability claim. It places the onus on employers to retain financial responsibility for their employees' sickness benefits for two years, before the disability insurance system steps in.

"The Dutch experience provides compelling evidence that policies causing employers to recognize the costs of disability claims can influence the trajectory of disability claims," Autor writes.

Coupled with the phase-in of experience-rated disability insurance premiums, the number of people entering the Netherlands disability insurance system fell by 40 percent from 2002 to 2004, and by another 50 percent from 2004 to 2006, according to Autor.

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