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Saturday, May 05, 2012 1:53 PM

2.2 Million Go On Disability Since Mid-2010; Fraud Explains Falling Unemployment Rate; Will Higher Disability Taxes Fix the Problem?

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Since mid-2010, precisely the time millions of US citizens used up all of their 99 week of unemployment insurance, disability claims have risen by 2.2 million. Those on disability are not counted in the workforce and are not considered unemployed.

Please consider Disabled Americans Shrink Size of U.S. Labor Force

The number of workers receiving Social Security Disability Insurance (SSDI) jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

The participation rate -- the share of working-age people holding a job or seeking one -- was 63.8 percent in March after falling to a three-decade low of 63.7 percent in January. Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year.

“How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.”

More than 99 percent of all SSDI beneficiaries remain in the program until retirement age, David Greenlaw, a managing director in New York at Morgan Stanley, wrote in a March research note, citing government data. The program provides an average of $1,111 in monthly income to eligible workers with a physical or mental impairment that will last at least 12 months or result in death, according to Social Security.

Unemployment insurance requires that applicants search for job opportunities, while disability insurance requires they be unable to work.

Lax Screening Procedures

Less-stringent screening procedures, more attractive benefits and a waning need for less-skilled workers have bolstered SSDI rolls.

In addition, “difficult-to-verify disorders,” including muscle pain and mental illness, more easily qualify for SSDI under program reforms, [David] Autor [economist at Massachusetts Institute of Technology] wrote in a 2011 paper.

Based on current trends, 7 percent of the nonelderly adult population could be receiving disability benefits by 2018, Richard Burkhauser and Mary Daly wrote in the spring issue of the Journal of Policy Analysis and Management. That’s two years after the SSDI program will run through its trust fund, according to an April report by the Social Security trustees. Costs Increase

Costs Increase

Costs have increased with the rolls: The program spent $132 billion last year, more than twice as much as in 2000.

Richard Burkhauser, a policy professor at Cornell University, and Mary Daly, associate research director at the Federal Reserve Bank of San Francisco, think the solution is to raise taxes on businesses with larger shares of people on disability.

So does David H. Autor in a white paper The Unsustainable Rise of the Disability Rolls in the United States: Causes, Consequences, and Policy Options.

While the paper provides a clear understanding of the problem, their proposed solutions, centering around more taxes, would make it more likely that businesses fire workers before they go on disability, make it more likely businesses will seek younger, not obese workers in excellent health in the first place.

While I am sure that happens today, nothing like incentives from the Fed to increase that pressure on businesses.

How About Stopping the Fraud?

Autor's proposals dot not go far enough to stop what is clear fraud.

Indeed, Autor explicitly states "A second lesson, evident from the drug and alcohol addiction experience, is that highly motivated applicants in many cases will eventually succeed in obtaining benefits, particularly because of the 1984 liberalization of the criteria for pain and mental illness. While this latter observation highlights that the SSDI disability determination system is badly in need of modernization, my main conclusion is that better gatekeeping cannot be the centerpiece of effective SSDI reform."

I do not buy that, nor do I buy  the excuse "Revoking benefits en masse from needy beneficiaries is not politically viable, whether or not this would be desirable from an efficiency standpoint."

What about the "not-needy, fraudulent beneficiaries"?

Moreover, this country better come to grips about what is "politically viable" before government percent of GDP soars to 56% like it is in France, or worse yet, the extremely unstable mess in Greece or Spain.

From an "efficiency" standpoint one has to be nuts to not to want to stop the fraud. And throwing money at alcoholics, drug addicts, and those claiming mental stress does nothing but increase those number of claims.

Mental Illness

I talked about mental illness and fraud on February 20, 2012 in Disability Fraud Holds Down Unemployment Rate; Jobless Disability Claims Hit Record $200B in January

Pre-crisis, mental illness constituted about 33% of claims. Now it's 43%. The cost is staggering, over $200 billion a year.

I did some calculations in the above link and this is what it looks like with a mere 10% rate of fraudulent claims. 
Unemployment Rate with 10% Fraud

  • 10% of 27.5 million is 2,750,000.
  • The civilian labor force would rise to 157,145,000 from 154,395,000
  • The number of unemployed would rise to 15,508,000 from 12,758,000
  • The resultant unemployment rate would be 15508/157145 = 9.9%

Is there anyone who thinks disability fraud is less than 10%? If not, then the unemployment rate would be at least 9.9% assuming those in fraudulent claims started looking for work.
Those numbers are as of the February BLS jobs release and would undoubtedly be worse now given Friday's Payroll Disaster: Nonfarm Payroll +115,000 Establishment Survey But -169,000 Household Survey, Labor Force Drops by 342,000


Amazing Achievement is Fraud

In the last year, the civilian population rose by 3,638,000. Yet the labor force only rose by 945,000. Those not in the labor force rose by 2,693,000.

In the last month, actual employment fell by 169,000, but the unemployment rate dropped by .1%.

That is an amazing "achievement" to say the least.

Since Mid-2010 2.2 Million Went on Disability

Notice the jump in claims after the recession was allegedly long-over.

The timing coincides with unemployment benefits expiring at 99 weeks. Supposedly higher taxes will fix the problem. I say "nonsense".

Mike "Mish" Shedlock
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