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SSDI “$1 for $2” Reform

Currently the Social Security Disability Insurance (SSDI) program covers almost 8 million Americans. The program is designed to help those who need assistance the most: those who cannot work due to disability. These individuals are entitled to approximately $830 per month.

One feature of SSDI is that it has an implicit 100% tax on earnings. If an individual is on the SSDI rolls and makes somewhat of a recovery and is able to work part time, any earned income will reduce the person’s SSDI benefits dollar for dollar. Thus, these individuals have no incentive to work even if they make a recovery.

Benitez-Silva, Buchinsky and Rust (2006) estimate the impact of a reform in which those on SSDI could keep 50% of their earnings from part time work. For instance, if an individual made $200 in a month, his or her SSDI benefit would be reduced by only $100 to $730 instead of being reduced by $200 under the status quo.

No work Work (status quo) Work ($2 for $1)
Earnings $0 $200 $200
Benefit $830 $630 $730
Total Income $830 $830 $930

One problem with this reform is that it may attract applicants to SSDI and increase the cost to the government. Since the reform would allow individuals to earn more money than the $830 cap, some individuals who are not disabled may fraudulently apply for the entitlement. The Congressional Budget Office (CBO) estimates that the reform would cost $410 million over five years and increase the number of individuals awarded benefits by 1.2%. The Social Security Administration (SSA) estimates are that the costs would be closer to $5.1 billion and SSDI rolls will increase by awards by 6.4%.

The authors of the study use Health and Retirement Survey (HRS) to conduct a more life-cycle simulation model. Taxes, social security benefits, application waiting times, continuing disability reviews (CDRs) are all incorporated into their model. They claim that 50% of all SSDI participants will eventually experience at least a partial recovery. Their major findings are as follows:

  • After the reform, SSDI awards will increase 2.2%. Other estimates: 1.2% (CBO) and 6.4% (SSA)
  • There will also be a modest increase in disability awards, rolls, and expected discounted costs.
  • For those who are on SSDI, pre-tax income would increase 9.3% over the status quo.
  • Currently, only 9.5% of all workers decide to return to work while on SSDI. These individuals can return to work either by leaving SSDI or working for 9 months under the Ticket to Work program (TWP). Participation in TWP, however, increases the probability of a disability review. After the reform–and assuming a constant disability review rate for those working–48.9% of individuals will return to work at some point while on SSDI. This does not mean that 50% of the individuals are not truly disabled, but that 50% of the individuals will have the ability at some point in time to return to (usually) part time work.
    The authors conclude that the welfare benefits of the reform to those on SSDI will more than offset the induced entry costs to society from having more applicants to the program. The authors give this program the thumbs up.

    Benitez-Silva, Buchinsky, Rust, (2006) “Induced Entry Effects of a $1 for $2 Offset in SSDI Benefits