From State Welfare to Federal Disability

In an excellent report on disability NPR’s Planet Money notes :

A person on welfare costs a state money. That same resident on disability doesn’t cost the state a cent, because the federal government covers the entire bill for people on disability. So states can save money by shifting people from welfare to disability. And the Public Consulting Group is glad to help.

PCG is a private company that states pay to comb their welfare rolls and move as many people as possible onto disability.

…In recent contract negotiations with Missouri, PCG asked for $2,300 per person [moved from state welfare to federal disability].

In other words, money and real resources are being paid to redistribute wealth from one set of taxpayers to another.


So what? This particular example is of course a waste of resources. But it is not different from what's going on in the private sector all the time and no sign of a systematic failure.

Different branches of government compete against each other for resources. Often this is beneficial because it increases efficiency, but sometimes it is a zero sum game and any money spent on it is an additional cost for the taxpayer. If these cases can be identified, we should get rid of them. But generally competition between branches of government is something that should be encouraged.

It is prima facie evidence that there is less accountability at the Federal level for this program. I'd consider that a systematic failure.

This is a fundamental misunderstanding. Private-sector competition serves the purpose of identifying the low-cost provider -- thus allowing a product or service to be supplied with maximal surplus. Public-sector competition, like that pointed out by Mr. Tabarrok, serves only to identify the provider with the loosest gatekeeping standards.

That's not true. There is plenty of wasteful competition around. It is very hard to argue that all advertisement creates welfare gains for consumers. A large share of it is just intended to shift consumption from one product to another. Firms effectively compete for a fixed amount spending. A lot of advertisement does nothing to improve the quality of products or enhance the welfare of consumers in any other way.

While it is individually rational for firms to advertise, their collective ad spending is above the optimal level because some of it is simply competition for fixed consumer spending. If firms could collective agree on less advertisement they would do so (this is prohibited by cartel laws).

So, all private interaction is the same and it is advertisement selling fraud because of cartel laws. I don't think we want to go down this road.

True, but the advertisement arms race provides for a voluntary way to finance even more expensive public goods.

> Firms effectively compete for a fixed amount spending.

Heh. I'd suggest that if you paid to learn this you go get your money back.

I said a large share, not all of advertisement spending is for competition over a fixed amount of spending. I don't think advertising greatly increases the amount you spend on toilet paper.

More generally, my point is that whenever you have competition between organizations, some of it will be in zero sum games. Depending on how organizations choose to compete, some of their spending will be wasteful. That holds in the private and in the public sector and is neither shocking nor a sign of systematic failure. Of course, one should try to avoid these situations by designing markets or government properly. But I much rather have competition with a bit of wasteful spending than no competition.

I don’t think advertising greatly increases the amount you spend on toilet paper..

Advertising sure as hell greatly decreased my spend on TP. Through advertising I found one of these glorious examples of why Westerns are barbarians.

-- Different branches of government compete against each other for resources. Often this is beneficial because it increases efficiency, but sometimes it is a zero sum game and any money spent on it is an additional cost for the taxpayer. --

Do you have some examples where competing levels of government led to increased efficiency and where the increase is attributable to said competition?

But it is not different from what’s going on in the private sector all the time and no sign of a systematic failure.

Other than the admittedly minor detail that the government is spending money taken / coerced from taxpayers, and the private sector (other than the large group of crony companies like Boeing, GE, Solyndra, most of Wall Street, etc., ad nauseum) can't take / coerce money from anyone.

I do agree that this is not a systemic failure - it is exactly what large crony systems do: redistribute money by force: a feature, not a bug.

However, maybe I misunderstood your point?

Taxpayers consent to pay taxes by the fact they vote in the people who pass laws in their behalf, and by the basic fact they are here at all. If they really do not like the situation they are free to leave. Hard to do at the federal level, but fairly easy at the state and local level.

There have been past MR posts on the spike in SS disability cases. This is interesting, though, that it pins the states and not the recipients with the behavioral changes that are causing the spike.

There is also a VERY different tax incidence effect from all of this shifting:

The wealthy escape paying for welfare costs that were previously paid out of general revenue and are now paid out of Social Security as disability payments

Consider: You are taxed for your Social Security on your earnings UP TO $113k. If you earn $350K, you are still taxed up to $113K. So, when state and local government move a person from welfare (which taxes all income, including up to your $350k income) you shift the cost to those making less than $113k who pay SS.

The mid nineties welfare reform moved some part of "welfare" off the general federal budget on to the SS disability budget.

What we should consider is reforming SS disability as part of SS refrom--moving SS disability to the general budget (where wealthy and non-wealthy share the costs of SS disability), reform disability (consolidate veterans benefits, institute work reforms for SS disability, conduct reviews of status, etc) and do some reform here. Just letting people know that the middle class are paying for welfare, and the wealthy are not, is one way to draw attention to this issue. Another way is to focus on how SS disability discourages work and is abused.

Bill, you believe in the fallacy that sources of revenue are tied to spending categories. Money is fungible. All the taxes go into one big checking account, then the federal government writes a bunch of checks.

OTOH, I agree that the tax base of states is different from the tax base of the federal government. Off the top of my head, I do not know which is more progressive.


Ask yourself this question: Is the Social Security "Trust Fund", in your mind, the same as the Federal Budget. Unfortunately, your fellow citizens think that it is a separate account that should not be touched, nor should money from general revenues be put into it: that is, it should be self-sustaining. You can't have it both ways, however, claiming it is separate, on one occaision, and not another. So, I take if from your comments that you do not object to spinning off SS disability from the trust fund and putting it into the general budget. Or, if you do object, then that tells me you recognize my point: that the middle class has borne the new "welfare as we know it" and those making more than $113k have not.

Bill, the "social security trust fund" is just a fiction to fool the rubes. Congress could eliminate it tomorrow and decide whether to keep the payroll taxes and whether to keep shoveling out money to old people.

As I said, all money goes into one big pot. Everybody pays about a 30% marginal tax rate, from those on eitc all the way up to billionaires. Don't tell me that those earning more than 130k pay less taxes than those earning less.

Tom, You are ignoring the point, or choose not to address it, whether or not it is in one pot: those making more than $130k are not being taxed for what previously had been part of the general budget. So, you should not object if SS disability comes out of the general pot.

As you said: "As I said, all money goes into one big pot."

And, taking up your challenge, I am telling you that "those earning more than 130k pay less taxes than those earning less" because as a percent of income, the marginal SS tax rate is 0.

Dig a deeper hole.

Smart post! Good ideas, and good politics.

There is some truth here, but, in the vast scheme of things, the Social Security disability levy is chump change. And since, overall, the middle class is currently undertaxed in this country, I'm not losing too much sleep over this.

It's worth noting that Medicare, a much bigger cost, has migrated from 'payroll tax' financing to 'general revenue' financing over the past two decades, which I also think is appropriate.

The wealthy aren't paying for Social Security? Someone making $1,000,000 pays about twice as much in Social Security taxes as someone making $60,000. I understand that you would like the millionaire to pay 30 times as much. But the claim that people with high incomes aren't paying is simply false---they're paying as much as anyone else, and more than most, even considering only Social Security taxes. Not that we should consider Social Security taxes in isolation. When taxes get taken out of my paycheck, I don't care what the line items say. I just care that the government is taking my money.

This person only pays up to the cap for Social Security taxes. A person making $150,000 a year pays as much in Social Security taxes as a person making $1,500,000 a year, so what's your point?

Of course, a person making 150k/yr also receives the same SS benefits as someone making 1.5M/yr. The cap in taxes corresponds to the cap in benefits. Two people making equal dollar contributions to a 401(k) will have the same amount available for retirement benefits, regardless of what percentage of income those contributions represent. In fact, the way the benefit formulas work, lower income contributors receive more in benefits than they contribute while higher income contributors receive less than they contribute. It is true, though, that a person making 150k/yr subsidizes low-income earners' retirements as much as a person making 1.5M/yr does since both earn more than the cap.

All of this raises the question, is Social Security a national insurance and retirement system or is it a welfare system? If the former, then one's benefits should depend solely on one's contributions/premiums: the more you pay during your working years, the more benefits you receive when you retire. Since people making 1.5M/yr don't need more SS benefits than anyone else --- arguably, they don't need any SS benefits --- it wouldn't make sense to have them pay more into the system. On the other hand, if the intent of SS is to subsidize the retirements of low-income earners, then we don't even really need a separate tax for it --- benefits could be paid out of general revenues based on the political whims of Congress just like all other welfare benefits.

SS disability isn't funded from the payroll tax. It is part of the general fund.

Nope. It's the 'D' in the OASDI Trust Fund.

You may be thinking about Supplemental Security Income (SSI), a small 'welfarish' arm of the Social Security Administration that is funded by general revenues.

The problem of disabled and elderly citizens is not solved perfectly by the public sector at any level. And not solved by the private sector at all.
I recall a recent GAO study commissioned by a Congressman worried about abuse of programs to assist low-income individuals, and found instead that Type 1 error was the greater problem: burdensome rules that prevented eligible populations from getting assistance. Maybe PCG could set up a side-business advising NSLP, WIC, and SNAP claimants.

In other words, money and real resources are being paid to redistribute wealth from one set of taxpayers to another.

Isn't this a tenet of the modern Democratic party? Certainly we just had an election with this idea as a fundamental principle.

So, I'm not sure what makes it particularly remarkable in this context. The Federal government pushes substantial costs onto the states in the form of new mandatory regulations on a regular basis. Indeed, it's virtually certain that many state's welfare rolls are higher than they would be otherwise due to Federal regulations. So what's the big deal?

Is not this redistribution exactly what all governments and all societies do? If the fire department goes to a burning house two blocks away, is this not a redistribution of wealth from me to my neighbor? The trick is for the state to get the money in an equitable and least drag imposing way and spend it in a efficient manner. Obviously, human institutions are fallible and liable to the nearly infinite powers of stupidity and corruption. Which means we should be vigilant and engaged in arriving at the goals and the means of getting those goals in our society. There really are no alternatives.

Is not this redistribution exactly what all governments and all societies do? If the fire department goes to a burning house two blocks away, is this not a redistribution of wealth from me to my neighbor? No, in that case you are paying for insurance and broad property protection. So that's a bad example.

Redistribution is taking money from one class and giving the money to another class. And certainly the Republican's are guilty of doing just that occasionally. But the Democrats ran on the issue.

So again, who cares that states are legally shifting welfare recipients to Federal disability roles? If the Feds have a problem with it, they need to tighten the qualifications.

Uh, not exactly. It seems as though the total bill ends up being the same but where it's funded has changed.

In general, though, the Democratic party does favor redistribution, just as the Republican party does, just as most parties do.

The people that are being moved to disability (SSI) must still qualify for it - so this makes sense. Given the large increase in SSI since the recession there seems to have been an easing of the qualifying requirements for SSI. People that we were previously working can't find a job and are now "disabled." I guess the definition of disabled now includes the inability to find work as opposed to the inability to do work resulting from some physical or mental limitation.

Well, lots more thinks count as disabilities that prevent an employer from hiring people.

Let's say you are blind. In the 50s and 60s, housing and businesses were connected by public transit or were within walking distance of each other. Today that is no longer the case.

The business logic is a blind worker should be paid less than a non-blind worker because they are less productive, if simply because they can't be assigned to fill in for someone else on a task that requires sight. Plus the costs of accommodations make them more costly. And then they can't be assigned or expected to work flexible hours because they depend on others to provide transportation, so they are not worth as much as a person who drives their own car. And thanks to lower tax rates or tough business conditions, every dollar extra a blind worker costs is going to cause a loss or higher prices on a one-for-one basis, and the Chinese workers are neither blind nor paid as much.

Is a blind worker in the US today not more disabled than in the 50s and 60s when tax rates were not only higher but taxes were paid at a higher rate, and import tariffs and barriers isolated blink workers from the global labor market?

Suggesting that technology and the Internet gives the blind more opportunity is to argue that the low cost housing which supports the blind with the ability to walk or use public transit to access all services are places with the best and cheapest broadband installation, better and cheaper than in places like Singapore where national policy is universal inexpensive super high speed broadband as a requirement. The policies on other nations on broadband and other technology mean that the blind in the US are at a disadvantage globally before their blindness is considered.

Blindness is thus a greater disability today than it was half a century ago.

I'm not sure that's correct, but even if it is, physical impairments are much less of a liability today due to the fact that so many more jobs, even very high-paying ones, have essentially no physical component.

And physical impairments are much more common than blindness.

What % of these welfare-to-disability transferees are blind, do you think?

From the article:
One of them, Scott Birdsall, went to lots of meetings where he learned about retraining programs and educational opportunities. At one meeting, he says, a staff member pulled him aside.

"Scotty, I'm gonna be honest with you," the guy told him. "There's nobody gonna hire you … We're just hiding you guys." The staff member's advice to Scott was blunt: "Just suck all the benefits you can out of the system until everything is gone, and then you're on your own."

Scott, who was 56 years old at the time, says it was the most real thing anyone had said to him in a while.

I wonder what percentage of graduates from retraining programs get jobs which pay more than they would have gotten without the retraining? The US spends a lot of money on retraining programs every year. Shouldn't we know the answer to that question. What's the ROI on the average retraining program?

Of course these are valid questions... but the larger point here in my view is just how insane this whole thing is. We pay people who cannot find jobs for all kinds of different reasons and with all kinds of justifications but at the end of the day this is just a shell game. We move the parts and try to handle the hot potato to the other guy but that is it. We keep adding layers and layers of people in the middle, costs go up... what a mess.

It makes me wonder if we should start looking at Hayek's minimum income idea as something that is worth it.

I think a minimum income is a good idea in general, but especially because it might help avoid the poverty trap-type problems.

It makes me wonder if we should start looking at Hayek’s minimum income idea as something that is worth it.

What's the difference between the dole and a minimum income?

The latter requires far less overhead. Of course, it will never be implemented because soon after, it would become apparent that we have a people-problem, not a poverty-problem.

Bread and Circuses for the Win! for definitions of a win that look a lot like a loss

Thanks for reminding me - when I heard the story on NPR, she commented that jobs not only require less physical labor, but the ADA requires employers to provide accommodations for the disabled.

So, my reaction was, with Wal-Mart the largest private employer, does Wal-Mart's employee population reflect the disability rate of the general population?

Should Wal-Mart employee the disabled at the same rate as the general population rate?

If Wal-Mart should not employee the disabled because that would increase prices, should the disabled in the US be euthanized if they aren't employed within two years based on the natural law of survival of the fittest?

How do economic models treat disability? As a choice driven by demand?

To your last question, I believe there is a well-established negative correlation between economic performance and disability incidence, so that might be a good place to start. Mysterious.

As it turns out, Walmart employs a much higher percentage of disabled (and older, and younger) folks than are present in the general population.

If you took a second to think about the pay rates and requirements for many positions at Walmart, you'd probably be able to work out why that is.

The biggest problem the handicapped, elderly and "too young" face in terms of employment in this country are various laws forbidding them from working.

Two notes:

(1) It's worth seeing David Autor's paper(s) on disability programs:

(2) If this graph from FRED is right, I'm not blown away by the increase:

The graph isn't wrong, but it's also not disability benefit data, it's disability self-identification from the Current Population Survey. The categorization of disability is based on with answers to the following questions.

* Is anyone deaf or does anyone have serious difficulty hearing?
* Is anyone blind or does anyone have serious difficulty seeing even when wearing glasses?
* Because of a physical, mental, or emotional condition, does anyone have serious difficulty concentrating, remembering, or making decisions?
* Does anyone have serious difficulty walking or climbing stairs?
* Does anyone have difficulty dressing or bathing?
* Because of a physical, mental, or emotional condition, does anyone have difficulty doing errands alone such as visiting a doctor's office or shopping?

It sure would be nice to just replace all these programs with a minimum income. There is something especially sickening about putting people into a public program where the benefits are only available as long as the beneficiary professes helplessness.

+1 Yes, and there are great disincentives from getting off it in case things don't work out because you will never be able to go back on to disability. Don't worry about EITC tax kinks; worry about SS disability permanent disincentives.

What with the declining health of Americans, thank goodness that, under the wise guidance of cosmopolitan moralists like Tyler, we've brought in tens of millions of unskilled foreigners to do the jobs Americans just can't do.

The devil is in the details ...

Gross numbers of disabled are up, and are setting records. This is nonsense: the number of breakfasts I've eaten in my life also set a record just this morning.

Check out the growth rates instead ... the data is freely available, and if you look at growth rates for disability claims ... they're just about where they've been for one, going on two, generations.

I'm a pretty loyal libertarian too ... and I was mighty surprised when I went actually go the data on my own; disability is a manufactured crisis targeted at people with a mean streak.

That's an awfully wonky graph. I'm not sure I'd assume that the same number of new entrants to SS due to disability as retirees isn't a problem or that an increasing rate over the last 3 decades isn't a problem.

The graph doesn't match the data it's linked to. The underlying disability data shows a much greater growth than the graph is portraying.

Here's some data to put it into perspective:

"The share of the U.S. population receiving Social Security Disability Insurance (DI) benefits has risen rapidly over the past two decades, from 2.2 percent of adults age 25 to 64 in 1985 to 4.1 percent in 2005."


This is why people are worried that if the trend isn't contained, we'll have yet another entitlement crisis to worry about.

It's funny now now in order to qualify as a problem it has to be a threat to national solvency.

Wasn't Bentham who said that if we solved all our economic problems we would have no moral problems? It is almost like that but the other way around - our economic problems become our only moral problem...

Gross numbers of disabled are up, and are setting records. This is nonsense: the number of breakfasts I’ve eaten in my life also set a record just this morning.
Check out the growth rates instead … the data is freely available, and if you look at growth rates for disability claims … they’re just about where they’ve been for one, going on two, generations.

All that is true. It does not mean that disability abuse is not occurring, however. For one thing, the ADA should have led to a decrease in disability claims, or at least to a much-reduced growth rate, now that employers are required to make reasonable accommodations for disabled workers. Tied in with this is the fact that fewer and fewer jobs are physically demanding.

Another point is that all of the recent growth in disability claims involves just two types of the myriad forms that disability can take: muscle-skeletal problems, such as backaches and joint pain, and psychiatric issues. Together these account for more than half of all the people receiving disability. And it may be no coincidence that they're also the two easiest types of disability to fake.

The increase in people opting out of the work force just might have something to do with the lousy wages paid in recent decades. I read somewhere that if you want more of something (like workers), you can try paying more for them.

To re-use Alex Tabarrok's turn of phrase, whenever governments pay for military or police forces, "money and real resources are being paid to redistribute wealth from one set of taxpayers to another".

However, that's a classic case of paying for a governmental service, like paying for roads, the courts, research, etc. It is not the same as redistribution.

Two groups of people supported the welfare reforms of the second half of the 1990s, which made cash assistance conditional on labor market effort in several respects. Group (a) just wanted to stick it to the poor, and group (b) cared about the poor but believed that it was wise to expect poor Americans to face strong incentives to work hard just as middle-income Americans face.

Strong liberals disagreed with both of these groups, but were defeated.

I think people in group (b) should recognize that it is right and proper to shift some low-income Americans from cash welfare to disability programs, even if their disability is mild or borderline. It is cruel to eviscerate the cash-based welfare component of the safety net and simultaneously push people with mild disabilities onto the labor market to sink or swim. We have to accept reasonable increases in disability program caseloads and budgets if we want to maintain the policy improvements of the welfare reforms. Otherwise, we are really sinking back in to group (a) and just sticking it to the poor.

Think about disability increases and welfare reforms as a policy bundle.

This is the Final Bubble. It's probably 2004 and PCG are the robo-signer mortgage originators. Crash already, please.

I have long thought that the whole welfare system is just simply rediculous - where is the regulation associated with keeping people on welfare for so long? As a country we keep going around and around in circles with the question "who is going to pay for this now?"

Basically what this is stating that we should move people (who are not disabled) from welfare to disability to be able to support them for less? What about they stop mooching off of OUR money and get jobs? There are so many systems in place to help people on welfare rehabilitate and get back out there into the work force, but who would want to work for minimum wage when they can get free handouts from the government and tax payers?

This thread faded out before I could get back to it.

Andrew': if it's a wonky graph, does that make it wrong?

Peter: Agreed. Good Point.

usfoodpolicy: Interesting point ... definitely want to think about that one some more, but it seems reasonable at first glance.

JWatts: We are more on the same page than your comment suggests. Looking at Figure 1 in the piece you site, you are focused on the (increasing) blue line, while the data I discussed is the (relatively level) purple one. My point is (and it doesn't deal at all with Peter's point) is that the gross growth rate of disability recipients is not showing an increase that could be regarded as a solvable problem. Your point is that the share of people receiving a disability may be a problem. In a sample like the one that concerns you (share of adults 25-64 claiming disability), the only way that can be trending up is if the 65-year-olds leaving the sample are less likely to be disabled than the 24-year-olds entering it. There's a couple of reasons that might happen. One might be that older disabled workers are more likely to die, making the disabled proportion of the population lower at that end. A second might be that we're declaring more people disabled at a very young age. The first is sad, but doesn't seem like a problem in need of a policy. The second one might be saying something quite alarming about our society, both in that people are getting declared disabled at such a young age, and that the rest of us have to carry their burdens.

Personally, I'm conflicted about this. I've met quite a few people who'd make me more comfortable if I didn't have to work with them. I'd much rather have them mainstreamed if that could be done effectively, but I also don't want a potential active shooter employed with me just because we're worried about the volume of disability claims.

I am sad to report that the capabilities of young people applying for disability are amazingly high in many cases. They are stating they are afflicted with ADHD, panic attacks, bipolar disorder, "hearing voices",etc, etc. Yet they excel at complicated video games, brilliant conversation, friendships, etc. If they are denied at first, attorneys are begging for their "business", because the attorneys get a cut of the government payout when the applicants eventually "win". (paid from our taxes).
The percentage of our population that is mentally ill (much less "shooters") remains the same as 50 years ago.

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