It would be a mistake to go Dutch — at least if that means repeating the disability insurance experience of the Netherlands.
Thirty years ago, that nation structured its government programs in a way that resulted in granting permanent disability payments to large numbers of residents. While the nation is now tightening eligibility, the disability rolls and resulting government expenditures remain quite high.
The United States is following a similar path, but few people are aware of the growing problem.
Economists David Autor of the Massachusetts Institute of Technology and Mark Duggan of the University of Maryland examine the rising U.S. disability numbers in an easily understandable article in the 2006 summer issue of Journal of Economic Perspectives. Their title, “The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding,” tells it all.
The proportion of the U.S. population of working age on permanent disability is rising rapidly, though it’s still lower than European levels. U.S. outlays under the disability insurance component of Social Security also are growing dramatically. If trends continue, disability payments will severely exacerbate the shortfalls expected as baby boomers retire.
The Dutch example is so striking that it merits examination. After World War II, many European governments implemented more generous welfare and retirement programs than the United States did. Even though unemployment rates for many of these countries remained lower than ours until the 1970s, these nations had higher proportions of their populations on retirement or disability.
In 1970, some 27 people received U.S. disability payments for every 1,000 active labor force participants. For Germany, Sweden and the Netherlands, the figure was about 50.
By the end of the 1980s, the U.S. rate had increased to 43 per 1,000. Meanwhile, Germany’s went to 72 per 1,000 active workers, Sweden’s to 78 and the Netherlands’ to 139. These figures are for ages from 16 through 64. For the middle-aged cohort (age 45 through 59), the U.S. number was 72 and the Netherlands, 317.
The Dutch numbers grew because their government loosened eligibility criteria, partly in response to high unemployment in the 1970s. For example, people were allowed to claim disability for job-related stress.
U.S. rates grew from 1970 to 1978 but then fell for five years when the Carter administration and then the Reagan administration tightened criteria. That tightening was stopped mostly because of court challenges and some congressional action.
Autor and Duggan note that in 1985, 2.2 percent of the overall U.S. population (not just the labor force) between ages 25 and 64 got Social Security Disability Insurance payments. In 2005, 4.1 percent of the population got disability. If trends continue, the authors said, “more than 6 percent of the non-elderly adult population will soon be receiving DI benefits.”
They identify three factors. First, 1984 congressional action “led to rapid growth in the share of recipients suffering from back pain and mental illness.” Second, disability payments rose relative to recipients’ former wages or salaries. Third, the rapid increase in the proportion of women in the labor force meant more people in the pool of insured workers.
Some will point out that this increase in disability payments is not necessarily bad. Perhaps those newly eligible had been unjustly excluded in the past. More recipients might merely indicate that we are a kinder, gentler nation than we were 20 years ago.
Economists have no special edge in answering the questions of who should qualify for permanent disability payments and how high should those payments be. This is a decision that has to be made by society as a whole through our democratic political process.
Higher outlays are not free, however. Disability payments made up 10.1 percent of Social Security spending in 1990 but climbed to 16.6 percent in 2005. Plus, the more people eligible for disability payments means increased Medicare spending because eligibility automatically confers Medicare coverage. About 15 percent of Medicare expenditures now go for disability recipients age 64 and younger.
This might be considered a minor problem if Social Security and Medicare as a whole were on firm financial footing. They are not. Moreover, the position statements of candidates from both parties in upcoming elections show little willingness to face the tough choices needed to reform these systems.
It is hard to remove or reduce some benefit once it is granted. The Dutch reversed course in the 1980s and began to limit new admissions to disability benefits. But they still have nearly 1 million people on disability compared to 7 million people in their labor force.
The sooner we start the reform process in the U.S., the less painful it will be — and the smaller the fiscal hole we will dig for ourselves. I am doubtful, however, that the next Congress will see it as a high priority.
A PDF version of the Journal of Economic Perspectives article is available at www.aeaweb.org/articles.php?doi=10.1257/jep.20.3.71.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.