Improving the System of Financing Long-Term Services and Supports for Older Americans

January 31, 2017

Aging populations threaten to put significant pressure on the institutions that fund care for older Americans in the United States. As Medicaid experiences the arrival of large waves of retirees, appropriate actions must be taken to ensure that only those who are genuinely in need receive financial assistance for long-term services and supports (LTSS). Weak rules and poor efforts by states to verify assets and collect under estate recovery programs are adding financial stress to the Medicaid program and crowding out private means of financing LTSS, such as long-term care insurance.

In this paper, Mercatus Senior Research Fellow Mark J. Warshawsky and R Street Institute Associate Fellow Ross A. Marchand describe the problems with the current system of financing LTSS, review recommendations from the 2013 Commission on Long-Term Care, and examine the weak efforts of states in designing and enforcing current eligibility rules. The study concludes that simple and targeted recommendations to reform Medicaid can lead to an overall improvement in the system of financing LTSS.

SUMMARY OF CURRENT LTSS FINANCING PRACTICES

The current system for financing LTSS in the United States faces significant challenges from changing demographics.

  • The burden of an aging population. The need for care will grow rapidly with the aging of the population, creating an unsustainable burden for the federal and state governments, who together currently finance 62 percent of paid LTSS. 
  • The burden of higher-income recipients. Five percent of retirees in the top two-fifths of the income distribution are receiving Medicaid LTSS support, with average payments that are more than 50 percent larger than payments for lower-income recipients.

Despite its reputation, Medicaid for LTSS does not benefit only the poor.

  • Significant variations in states’ asset-counting rules. Owing to heterogeneous state rules, nearly a third of retirement assets are not being counted against Medicaid eligibility requirements. Lax requirements in one state unfairly burdens other states.
  • High homeownership rates among older Americans. In 2012, more than 80 percent of retired households age 65 through 67 owned their own homes, which are excluded from countable assets in determining Medicaid eligibility. But the extensive development and use of various financial products, such as home equity lines of credit and reverse mortgages, make the home a liquid asset from which retirees can draw for income and resources.
  • Variations in asset verification among states. According to a 2011 survey, only 37 states asked Medicaid applicants for information about their primary residence (with some of the remainder looking at county property records). Less than half the states asked for information going back five years. Some states did not verify reported income from government agencies such as the IRS and unemployment insurance programs. Few states contacted financial institutions, even when listed on an application.

Estate recovery programs, in which states reclaim the value of Medicaid expenditures on LTSS after the death of the unmarried individual or surviving spouse, have significant room to improve.

  • Manipulation of home equity to avoid asset recovery. States’ adoption of estate recovery programs induces older Americans to decrease their home equity, which leads to a decrease in the proportion of the total wealth portfolio that is composed of primary housing assets.
  • Ability to recover significantly more. Using the state with the highest recovery rate in any year as the standard, the study demonstrates that over the 2002–2011 period, aggregate recovery could have been $24 billion instead of the $4.4 billion that was actually recovered.

POLICY RECOMMENDATIONS

The federal government could implement and enforce the following reforms by reducing Medicaid matching rates for noncompliant states.

  • Tightening asset-related eligibility rules. The federal government could ensure that Medicaid resources are better targeted to individuals with insufficient financial means by requiring that the retirement assets of applicants be subject to asset counting, requiring electronic asset verification, and requiring states to ask applicants to produce financial information on all available resources for the five-year period preceding application.
  • Narrowing the “primary residence” exclusion. Currently, states are not allowed to set the equity interest exclusion below $545,000, roughly two-and-a-half times the median value of a US home. Lowering this amount would diminish the incentive for applicants to manipulate their home equity and ensure that enrollees are only those with legitimate need.
  • Forcing states to get serious about estate recovery. The federal government could significantly improve recovery rates by enforcing the existing requirement on states to automatically impose liens on the housing properties of Medicaid beneficiaries.

Dysfunctions in the Federal Financing of Higher Education

January 19, 2017

Conventional wisdom suggests that expansions in federal student aid will result in a more affordable and equitable postsecondary education system. While this belief has motivated significant expansions of federal aid for students, rapidly increasing costs and student loan default rates are raising questions about its validity.

Mark J. Warshawsky and Ross Marchand provide an overview of the relationships among student aid, educational costs, wages, and student loan defaults. Their study finds support for the theory that federal aid has increased the cost of education and discredits the notion that broad subsidization of college education will reduce wage inequality, a mix of outcomes that should motivate policymakers to rethink the current approach to postsecondary education.

THE EFFECT OF FEDERAL AID ON THE COST OF EDUCATION

A major strand of the economic literature on higher education examines whether increases in federal financial aid increase or decrease the cost to students of attending college.

  • From 1980 to 2014, gross tuition and fees for the average full-time undergraduate student increased by 229 percent in inflation-adjusted dollars.
  • This increase coincided with an explosion in federal aid for students. Inflation-adjusted government spending on higher education ballooned from less than $18 billion in 1970 to more than $166 billion in 2016, with a peak of $190 billion in 2010.
  • Former secretary of education William J. Bennett posited that increases in federal aid will be absorbed by universities in the form of higher tuition instead of improving affordability for students, a theory that has found empirical support.
  • Indeed, large average real increases observed in costs persist even after grant money is taken into account: increases in financial aid to students have been offset by increases in tuition, room, and board across all university types.

THE COLLEGE WAGE PREMIUM

Another strand of research has suggested that policies that subsidize higher education may reduce wage inequality by lowering the premium paid to college-educated workers.

  • The flagship study supporting this hypothesis suffers from severe methodological problems, and related studies have found that labor demand, not supply, has been more influential in determining earnings inequality.
  • Furthermore, for workers who graduated college but did not obtain graduate degrees, plateauing wages coupled with a rise in net tuition have led to financial difficulties, subtracting from any earnings “premium” gained from attending college.
  • Indeed, the relative supply of college graduates has gradually increased from 1991 to 2014 while the relative value of a college degree has remained constant, challenging concerns of a supply-driven increase in the college wage premium in recent years.

THE STUDENT DEBT PROBLEM

Much of the federal support for students comes in the form of student loans that have increasingly become a burden that borrowers are unable to bear.

  • Across all types of students and institutions, lifetime default rates increased significantly from 2002 to 2011, with loans to students who attended for-profit schools, two-year public institutions, and certain nonselective four-year colleges the least likely to be repaid.
  • The number of these nontraditional students increased rapidly in the first decade after 2000. These students are less likely to complete their programs than traditional students are, and they often live in poverty following enrollment.
  • These are not the only students at risk, however. Over the 2002–2011 period, the increases in default rates for attendees at two-year public institutions, underclassmen at four-year institutions, and upperclassmen at four-year institutions are 36.0 percent, 47.0 percent, and 62.5 percent, respectively.
  • These results call into question the justification for federal spending on postsecondary education: that a college education is supposed to increase the wages of graduates, enabling them to pay back loans with sufficient earnings left over to finance a higher standard of living.

CONCLUSION

These findings should be disappointing to policymakers and taxpayers because they indicate policy failures and dysfunctions. Indeed, the increase in financial aid may be encouraging some young people to waste the precious years of young adulthood in a largely unhelpful college education that results in a heavy debt burden. The massive expansion of federal resources to higher education may harm rather than help many students while failing to advance important public policy goals of prudent financing, broad access, improved efficiency, and enhanced productivity.

State and Local Public Pension Finances and Reform Proposals

November, 2016

Some states and municipalities are in difficult financial straits. Many more have severely underfunded defined benefit pension plans for their past and current employees. At the intersection of these two sets, it is likely that the pension plans are not sustainable and cuts are inevitable, affecting even the benefits of current retirees. But in many of these states and municipalities, the courts have not allowed changes to the pension plan. Therefore, we propose that all government pension plan participants be given accurate information about the funded status of their pensions. Furthermore, we propose that, at the discretion of the plan sponsor, retirees and older workers be given the voluntary option to take their pensions as a lump sum, discounted according to the funded status of the plan.

A Proposal for Allowing State Pension Buyouts

Wednesday, August 17, 2016
Authors: 
Mark J. Warshawsky

Many U.S. state and local employee pensions are facing dire problems as massive plan liabilities come due, threatening to drain government coffers. As Robert Novy-Marx and Joshua Rauh wrote in the Journal of Finance, 21 state pensions held less than 40 percent of the assets needed to pay benefits. Their estimate of the aggregate “funding gap” faced by states was roughly $2.5 trillion in 2009. Since then, the story has not improved, and it has likely worsened. Puerto Rico recently joined Detroit as a case study of fiscal and public pension mismanagement and failure, and the Puerto Rican pension is essentially without any assets.

Prohibitive Costs of Full Funding

In short, many state and local plans today are simply unsustainable. To fix the problem, taxpayer contributions to these funds would need to drastically increase, on top of already-high tax rates. Another study by Novy-Marx and Rauh in the American Economic Journalreported that state and local governments contribute an average of 5.7 percent of their annual revenue to employee pensions. Fully funding the plans would require raising annual contributions to 14.1 percent, meaning an extra $1,385 per year from each taxpayer – and the annual shortfall exceeded $2,000 per taxpayer in five states.

These calculations exclude state obligations for retiree health benefits to former employees. Paying for all these employee obligations and already-existing public debt is going to get more difficult as citizens and businesses begin to move to other locations where the tax overhang is less onerous.

A Buyout Proposal

We recently proposed a realistic and fair approach to public plan reform, in which distressed states and localities could be allowed (but not required) to offer pension participants a buyout of their benefits. In particular, the buyout amount would be calculated by taking the present value of each person’s accrued retirement benefits discounted according a conservative interest rate, and multiplying it by the funded percentage of the plan plus five percentage points. Using the plan’s funded status will prevent the plan from becoming insolvent if many retirees select the buyout, while the extra five percent serves as a sweetener to take the offer.

Additionally, federal law should require that state and local governments file an annual report with the U.S. Treasury that includes information on plan participant demographics and the current and expected future funding status of their pension plans, using uniform and conservative economic and financial assumptions. This is now required for private sector pensions and Social Security. Moreover, all pension plans should be required to report this information to participants in plain language.

Will Buyouts Work?

Some claim that a buyout plan like ours will not work. For instance, they worry that take-up rates could be disproportionately high for low-income workers or those with pressing medical needs. But it is unlikely that there will be disproportionate exodus of the low-income, low-health from pension plans, since severalstudies show that healthy, high-earning individuals also discount future earnings. In tandem, physical and financial health usually lead to greater enjoyment from immediate income.  Therefore, we might expect both high-and-low earners to take lump-sum offers, leaving behind individuals on neither extreme.

Lump-sum critics also warn us that if the proposal were adopted, pensioners wouldn’t take it and instead simply wait around for a federal bailout. But we are convinced that a federal bailout is not forthcoming, since Congress and the Administration pointedly did not bail out Detroit, Puerto Rico, or multiemployer pension plans.  They understand the massive burden that this would impose on taxpayers now and in the future.

An old proverb states that when on a sinking ship, “he who hesitates is lost.” Policymakers must act quickly to unshackle pensioners from fiscally unsustainable plans when state law and constitutions prohibit the kinds of pension changes that private employers have been able to bring about. Lump-sum schemes aren’t perfect, but they offer a realistic path to reform while giving public employees more certainty and sparing states and municipalities from fiscal ruin.

The Extent and Nature of State and Local Government Pension Problems and a Solution

January 7, 2016

A number of US states and municipalities are facing dire fiscal crises, while many more have severely underfunded public employee pension plans. At the intersection of these two problems, the sustainability of many state and local government pension plans in their current form is highly doubtful. Benefit cuts for both current employees and current retirees may be necessary to save these plans from insolvency. However, the rigid legal protections many states have built around pension benefits provided to public employees mean that reforms will have to be voluntary for plan participants if chaotic failures are to be avoided.

A new study for the Mercatus Center at George Mason University examines both the overall financial condition of state and local pension plans and the legal impediments to pension reform. It argues that reform proposals that assume the federal government will bail out state and local pensions are politically and economically unworkable and unfair. Instead, it presents a two-pronged reform proposal: (1) require state and local authorities to disclose the financial condition of their pension plans to beneficiaries in plain language and using standardized conservative accounting assumptions, and (2) allow state and local governments to offer beneficiaries a choice between accepting the uncertain and risky future benefits originally promised or receiving a discounted lump-sum benefit right away.

To read the study in its entirety and learn more about its authors, Mercatus Senior Research Fellow Mark J. Warshawsky and Mercatus MA Fellow Ross A. Marchand, please see “The Extent and Nature of State and Local Government Pension Problems and a Solution.”

BACKGROUND

Retirement Plan Trends and Differences between Public and Private Plans

  • Governments continue using defined benefit plans while private employers switch to defined contribution plans. Under defined benefit plans, retirees receive a lifetime stream of retirement income from their employer, while under defined contribution plans, employees are only entitled to the amount of money contributed to their individual accounts. While the use of defined benefit plans in the private sector has declined considerably in the past two decades, 83 percent of state and local government retirement plans are defined benefit plans.
  • Government workers receive higher compensation than private workers. One study conducted by economists with the Bureau of Labor Statistics found that, when comparing employees of similar skill levels, state employees have 3–10 percent higher compensation than their private counterparts, while local employees have 10–19 percent higher compensation.
  • Public pensions have looser accounting rules than private pensions. Public pension plans typically must follow standards developed by the Governmental Accounting Standards Board. These standards are much looser than the federal and private accounting rules governing private defined benefit plans.

The Dismal Financial State of Public Pension Plans

Several recent studies on state and local pension plans have found that a number of state pension plans are not sustainable and would require considerably higher contributions to remain solvent. For example, one study calculated that pensions in 21 states had funded percentages below 40 percent in 2009.

Another study found that, on average, state and local governments currently contribute 5.7 percent of annual revenue to their pension funds, but would need to contribute 14.1 percent to fully fund the programs. The average taxpayer would need to pay an additional $1,385 per year in taxes to close this gap. In the five worst states, the shortfall is more than $2,000 per taxpayer.

In addition, another study estimated that nearly a third of state pension plans will be exhausted within the next two decades.

Legal Rigidity of Pension Benefit Protections

Despite the dire situation many state and local pension plans are in, pension reforms are complicated by the legal protection most states grant to state workers’ pension benefits. While some bankrupt municipalities have been able to reduce their pension obligations in federal court, most states have restrictions on doing so, and furthermore bankruptcy is not currently an option for states. The types of legal protections afforded to state employee pension benefits can be classified into four broad categories:

  • Gratuity. Pension benefits are treated as an alterable form of payment, with few, if any, restrictions on what can be changed.
  • Contract. Pension benefits can be changed, but only in certain limited circumstances.
  • Property. Pension benefits are regarded as property, and can only be taken away with due process.
  • Constitutional. Pension benefits are protected by the state constitution, meaning there is almost nothing states can do to alter pension benefits for employees.

In some states, these protections apply only to current retirees. In others, current workers’ pension benefits are protected as well, further complicating reform efforts.

PROPOSALS FOR REFORM

A Federal Bailout Is Politically and Economically Unworkable and Unfair

Other pension scholars have made proposals for pension reform under the assumption that many state governments will soon be insolvent because of underfunded pension liabilities, and that a federal bailout of insolvent state and local pension plans will be inevitable. Proposals that include federal bailouts would lead to hundreds of billions of dollars in new federal spending and simply transfer the liabilities to the federal government without encouraging reform before pension plans become insolvent.

Such bailouts are unfair to the majority of states and municipalities that give modest retirement benefits to their employees and have responsibly funded these benefits, as well as to taxpayers who have responsibly funded their own retirements by themselves or through their employers. Moreover, recent precedents argue strongly against a federal government bailout. In the Detroit bankruptcy, retirees lost significant cash and healthcare benefits and no federal bailout was forthcoming. Owing to a recent federal law, thousands of retirees in multiemployer pension plans will soon be receiving notice that their benefits will be cut because their plans are approaching insolvency. In this case Congress explicitly rejected a federal bailout on a bipartisan basis.

An Alternative Proposal: Local Reform

The impending insolvency of many public pension plans is largely the result of poor governance and planning on the part of state and local officials. States, municipalities, and their pension plan beneficiaries and representatives should solve their problems from within rather than relying on the federal government. An alternative plan for reform should include the following features:

  • Reporting requirements. All state and local governments should be required to file an annual report with the US Treasury that includes information on plan participant demographics and the funding status of their pension plans, using standardized conservative accounting assumptions, as is done in the private sector. Plans should be required to report this information to participants in plain language. Any states or municipalities that fail to comply should lose federal tax exemptions for the interest on their bonds.
  • Voluntary buyouts for plan participants. State and local governments should be allowed, but not required, to offer retirees below age 80 and older workers a lump-sum buyout of their pension benefits. The buyout amount should be calculated by taking the present value of the accrued retirement benefits and discounting it by 100 percent less the funded percentage of the plan, and then adding 5 percentage points. Basing the discount on the plan’s funded status would prevent the plan from becoming insolvent if many retirees opt for the buyout, while the extra 5 percent would serve as an additional incentive for participants to take the buyout.

CONCLUSION

In the shadow of the pension insolvency crises looming over many state and local governments, taking action sooner rather than later will avoid painful, chaotic outcomes in the future. The proposal offered in this study presents a realistic reform option that would improve the financial status of state and local pension plans while giving retirees a chance for certainty and flexibility in retirement.

Reforming Administrative Legal Review in Disability Insurance

Monday, October 5, 2015
Authors: 
Mark J. Warshawsky

The Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) programs have many financial and structural problems. In a recent editorial, we detailed problems with the system of benefit claim appeals, presided over by administrative law judges, and we proposed several solutions.1 Because the editorial, based on an earlier study by Mark J. Warshawsky,2 was published in The Wall Street Journal, it garnered attention from the public, the media, and others. We therefore thought it worthwhile to continue, up- date, and deepen our examination of the topic, adding reviews of some recent comprehensive reports — econometric, analytical, and based on case studies — from academic and government sources. Also, we undertook our own empirical analysis of judicial decisions over a longer period that includes more recent data. 

It is difficult to come to a definitive conclusion based on any one study, report, or analysis, but when varied sources reach similar conclusions through different methods and approaches, they build a compelling case. Here we find such a case, in which serious failings by the ALJ system — at a time of large claim backlogs — have led, on net, to large losses for taxpayers. We estimate that more than $72 billion will be paid to claimants over their lifetimes through likely unwarranted disability benefit awards given by ALJs over the 10-year period from 2005 through 2014. Recent public scrutiny and administrative changes have curbed some of the worst excesses, but serious problems with the benefit claim appeals process remain. Moreover, the problems’ original magnitude could easily return when public and management attention moves elsewhere or when political pressure builds again to reduce the claim backlog. Therefore, serious permanent administrative reform is needed to lock in the recent changes and to build on them to enhance their positive effects. The appropriate time to do so is now, as the disability insurance program is expected to be insolvent in less than two years. 

Background 

The Social Security Administration (SSA) manages two large federal disability programs: SSDI and SSI. As of 2014 about 19.4 million individuals receive about $200 billion annually in benefits through these two programs. Individuals enrolled in SSDI for two years are also automatically en- rolled in Medicare, which costs taxpayers about $80 billion a year. SSI recipients are eligible for Medic- aid immediately. 

When an individual applies for disability benefits, the case is initially decided by state employee examiners in Disability Determination Services (DDS). There is also an automatic pre-effectuation review — an internal review of a decision before it is finalized and communicated to the claimant — of 50 percent of DDS allowance decisions. In 40 states and in most of California, an applicant who is denied benefits may appeal to a different reviewer in the same office. The SSA, which oversees each state’s DDS, claims that there are few errors in the original adjudication of these decisions. If the second reviewer denies benefits, the applicant may appeal to an ALJ.3 If the ALJ then awards disability benefits, the decision is final because the government cannot appeal it. But if the ALJ denies benefits, the individual may appeal to the SSA Appeals Council and, in a civil case, to the several levels of the federal courts. In total, there are at least five levels of review for a disability benefits applicant. Any error by a state adjudicator or an ALJ against an applicant is fixable, whereas an error by either against a taxpayer is not. 

Continue reading

Reforming the System of Review by Administrative Law Judges in Disability Insurance

September 10, 2015

While the prevalence of disability in the US working-age population has remained flat, beneficiary enrollment in the Social Security Disability Insurance (SSDI) program has grown dramatically since the 1980s. As the SSDI trust fund heads toward insolvency—which it is projected to reach in 2016—policymakers would be wise to review and address such discrepancies.

A new study published by the Mercatus Center at George Mason University finds that part of the problem can be traced to a flaw in the SSDI program’s administrative structure: even if an applicant is twice denied disability benefits by the Disability Determination Service, he or she can often obtain benefits by appealing the rejection to an administrative law judge (ALJ).

This study analyzes ALJ decisions using case studies, economic literature, descriptive statistics, and econometric analysis. It finds that these varied sources—which employed varied methodologies—all reach a similar conclusion: serious failings by the ALJ system have led, on net, to large losses for taxpayers. This study concludes that a group of judges are deviating from the law to award unwarranted disability claims. It estimates that decisions over the past decade by these “outlier” judges will cost taxpayers more than $72 billion.

To read the study in its entirety and learn more about its authors, Mercatus Visiting Scholar Mark J. Warshawsky and Mercatus MA Fellow Ross A. Marchand, please see “Reforming the System of Review by Administrative Law Judges in Disability Insurance.”

SUMMARY

Many studies, using a variety of methodologies, have come to the same conclusion: a group of high-approval ALJs are systematically making poor decisions, at a high cost to taxpayers.

PREVIOUS EMPIRICAL WORK

  • A 2014 report by the US Office of the Inspector General uses remand and reversal rates as a proxy for judicial decision quality and finds that low-approval ALJs have similar rates to the mean ALJ.
  • The same report finds that eight of the twelve lowest-allowance judges “decided fewer cases than the average of their peers.” Thus, low-allowance judges are few in number and do not appear to decide more inaccurately than the average ALJ.
  • High-approval ALJs, however, consistently exhibit poor decision-making. Internal Social Security Administration memos and other econometric analysis find that there exists an “iron triangle” between high approval rates, high decisional count, and poor decision quality.
  • An econometric study finds that long-serving judges tend to be more lenient.

AUTHORS’ EMPIRICAL WORK

  • Using two standard deviations both above and below the yearly mean ALJ allowance rate as a benchmark, the authors estimate that the decisions of “outlier” judges between 2005 and 2014 will cost US taxpayers more than $72 billion in likely unwarranted disability benefit awards.
  • The authors conduct a regression analysis to determine the relationship between judges’ yearly allowance rates, the standard deviation of allowance rate over tenure, and decision volume. They find that “high-allowance” judges—unlike average or “low-allowance” judges—are consistently lenient year after year, and also decide more cases.

CONCLUSION AND RECOMMENDATIONS

The over-provision of disability benefits by outlier judges carries large economic stakes, both in monetary costs to taxpayers and in opportunity costs as capable workers detach from the workforce.

While recent public scrutiny and administrative changes have curbed some of the worst excesses, serious problems with the benefit claims appeals process remain. To restore sustainability and integrity to a troubled claims appeals process, the study recommends the following:

  • Increase accountability by strengthening and expanding random reviews of ALJ decisions.
  • Limit “gamesmanship” and reduce the number of claims by preventing anyone from applying for disability benefits more than once in a three-year period.
  • Eliminate “on-the-record” decisions—decisions for cases that lack proper documentation—because these are very difficult for the agency to subsequently review for program eligibility in continuing disability.
  • Cap at 500 the number of cases heard annually by each ALJ. This would reduce ALJs’ incentive to favor approvals in an attempt to rush through a backlog of cases, because judges must marshal more documentation for a denial than for an approval.
  • End the “three hat” rule, according to which the judge is supposed to advocate for the claimant, advocate for the government (that is, the taxpayer), and render an unbiased judgment.
  • End lifetime ALJ tenure and institute a 15-year term limit.
  • Require the Social Security Administration by statute to conduct a statistically valid number of preeffectuation reviews of ALJ allowances.

To Make Social Security Disability Insurance Fairer and Sustainable, Eliminate the Grid

Tuesday, April 28, 2015
Authors: 
Mark J. Warshawsky

When severe and permanent disability strips workers of their ability to support themselves and their families, their plight demands our support. The United States has heeded this call through the Social Security Disability Insurance program, but at a large and growing cost. Our system is going broke and fails to reflect a 21st century labor force. 

The program uses a “Listing of Impairments” to determine whether an applicant is disabled. Traditionally, applicants without a medical condition meeting or mirroring an entry on the listing faced great difficulty in obtaining benefits. Listing-based determinations, however, have plunged from 80 percent to 50 percent over the past 30 years according to the Social Security Administration. In these decades, determinations shifted from the listings to a complex array of rules known as the “Medical-Vocational Grid.” 

The grid—designed for cases that fail to meet the listings—uses age, education/skills level, and language proficiency as determinations criteria. But the grid has grown increasingly outdated even as its use proliferated. Continuing to eschew the listings in favor of the grid is fiscally unsustainable, and grossly unfair to current workers.

In a bygone era, the U.S. labor force’s heavy reliance on physical labor made age a relevant factor in assessing disability. But the tremendous growth of the service sector in the “new economy” has supplanted old professions and introduced deskwork as the new norm. Dr. Timothy Church of the Pennington Biomedical Research Center estimates that the percentage of all jobs requiring at least moderate physical exertion declined from over 50 percent in 1960 to 20 percent in 2008.

This shift toward sedentary labor has gone hand-in-hand with increases in labor force participation by older workers. According to the U.S. Bureau of Labor Statistics, 30 percent of civilians aged 55 and over went to work in 1985. Today, 40 percent of the 55+ age cohort participates in the labor force. This upward trend continues, as advances in technology allow—and changes in social practices and market incentives encourage—the older worker to be the norm rather than the outlier. The rule of emphasizing age in disability determinations is outdated and unfair to the millions of Americans 50 and older who participate in the labor force.

A similar story emerges when we examine the role of English proficiency in the labor force over the past 50 years. In 1950s America, a Mexican or Columbian in the U.S. labor force would face substantial work limitations if he or she were “late to the game” in learning English. But contemporary America offers far more opportunity to foreign speakers. A Latino immigrant can now find a plethora of ethnic enclaves in the United States with ample opportunities for Spanish employment.

Even outside of these enclaves, industries heavily involved in trade and globalization put a premium on foreign speaking employees. Why, then, does English proficiency remain an integral part of the determinations process? A system where workers can readily use a foreign tongue to obtain disability payments is a fundamentally unfair system.

The SSA’s use of education level as a determination factor is equally outmoded. The grid favors those with a “limited education,” defined by a lack of a high school diploma. But the labor force is more educated than ever before. U.S. Census data tells us that 80 percent of adults 25 or over have a high school diploma, a 40-percentage-point increase from 1950.

The grid’s rules on education were written for a time when a vast majority of workers failed to complete high school and were at a sharp disadvantage compared to the few that graduated. Currently, struggling workers borrowing money to attend community college courses at night subsidize dropouts deemed to have “little education.” Keeping these built-in advantages for less-educated applicants is unfair, given the sacrifices made by workers trying to further their educations.

The continued use of education, language, and age in disability determination fails to account for the advances of the modern era. Restoring fairness to the determinations process means that the grid needs to go. Additionally, the Listing of Impairments needs to be frequently updated. The agency already promises five-year revisions, but these updates are rarely systematic.

Critically, medical advances that make diseases more “livable” are left out. Legal scholar Adrienne Jones castigates the SSA for using “1993 medical criteria to determine disability in 2014” in its handling of HIV/AIDS cases.

Factoring these societal and technological advances into the disability determinations process will end Disability Insurance’s unsustainable expansion and restore fairness to our nation’s critical moral endeavor.

Modernizing the SSDI Eligibility Criteria: A Reform Proposal That Eliminates the Outdated Medical-Vocational Grid

April 28, 2015

The Social Security Administration has been awarding benefits through its Disability Insurance (SSDI) program at an increasing rate, but meanwhile the actual rate of disability in the US population working age and older has remained stable or even decreased. The SSDI Trust Fund will run out of money by 2016. While some propose transferring payroll taxes from Social Security’s retirement fund to its disability fund, it would be much better to address the underlying problems by reforming the SSDI system.

A new paper published by the Mercatus Center at George Mason University documents the growth of SSDI and explains that the “medical-vocational grid” reflects a view of the labor market and disability that is out of date with the economy and modern medicine. The grid’s guidelines make it easier to award SSDI benefits to middle-aged and older workers, unskilled workers, and non-English-speakers, and should be eliminated and replaced with a simpler, fairer, and more uniform system for determining eligibility. The same process applied to people under age 45 should also be applied to those above age 45.

To read the paper and learn more about its authors, economist Mark J. Warshawksy and Mercatus MA Fellow Ross A. Marchand, please see “Modernizing the SSDI Eligibility Criteria: A Reform Proposal That Eliminates the Outdated Medical-Vocational Grid.”

BACKGROUND

Disability Insurance Criteria
The Social Security Disability Insurance program was enacted in 1956, providing federal benefits to citizens deemed unable to work due to disability. The main criterion for getting SSDI benefits was functional incapacity due to a medically determinable impairment. Four criteria were included in the evaluation process:

  • A person who is performing substantial gainful activity cannot be found disabled.
  • A person must have a medically determinable impairment, expected to last for a long time or result in death, that significantly limits his or her ability to perform basic work activities.
  • The impairment must meet or equal one or more of the impairments in an official listing.
  • If a person is otherwise qualified for SSDI benefits but does not have an impairment found in the listing, then vocational factors (age, education, and work experience and skills) are considered.

The Social Security Administration has promulgated rules and procedures for each of these steps, several of which would benefit from reform. But any reform effort should focus on the fourth criterion, which opened the door to the medical-vocational grid.

The Medical-Vocational Grid
SSDI applicants who do not qualify as disabled under the official listing move on to the fourth criterion, the medical-vocational grid. If an applicant is considered unable to engage in his or her previous level of work based on work history, but does have an ability to undertake some form of work, then the applicant’s eligibility for SSDI will be determined using the grid. Depending on the level of work possible, applicants will be deemed eligible or ineligible based on their age, education, skills, and language ability. This approach makes several mistakes:

  • It makes age a hard cutoff. For example, a 50-year-old who can perform only sedentary work and is unskilled is presumptively disabled, while a 49-year-old is not (unless he or she cannot speak English). Given increases in the average human lifespan, the age cutoffs and loose standards for age-related disability are ripe for reform. Many in the baby-boomer generation who wish to retire early will be found to be disabled under the medical-vocational grid if they have a history of unskilled work or skilled work with skills that do not transfer to other work.
  • It regards language as a factor. Using the English language as a criterion can have a counterintuitive effect, and language is no longer the barrier it once was. In Puerto Rico, a lack of English skills will result in applicants being deemed disabled, even though the common language in Puerto Rico is Spanish. The US workforce is far more diverse culturally, ethnically, and linguistically than it was in the 1950s. For example, more than half of the increase in the labor force between 1996 and 2012 came from foreign workers.
  • It leads to more eligible beneficiaries. The loose standards of the medical-vocational grid have allowed many types of ailments to qualify for disability benefits despite questionable medical proof. For example, as numerous cases of fraud discovered in 2014 demonstrate, the increasing proportion of awards to those suffering from mental illnesses and musculoskeletal diseases may be caused by some applicants gaming the system and misrepresenting their conditions.
  • It assumes jobs require physical exertion. The medical-vocational grid fails to consider that the nature of the workforce has changed over the last several decades. The economy has shifted away from exertional jobs that require direct physical labor and toward more sedentary jobs, owing to computerization and mechanization. Moreover, flexibility within a career was an exception in the 1950s, while today people switch jobs and occupations more readily than ever before.

POLICY PROPOSALS

  • The official medical listing of diseases and conditions should be updated on a regular basis rather than infrequently. (In the past, sometimes more than a decade has gone by between updates.) As technology and medicine progress, so too must the government’s ability to determine whether diseases and conditions are truly disabling.
  • The medical-vocational grid, involving age, education, and language skills, should be eliminated. As older people live longer and work less physically demanding jobs in a more open and less educationally segregated workforce, the grid is no longer fair or necessary—nor does it reflect current conditions. Age, education, and language skills should not be considered.
  • If age must be considered, policymakers should raise the cutoff—for example, to above age 60.
  • Eliminating the medical-vocational grid will require legislation, but—as an interim step—the Social Security Administration can increase all age requirements by five years through regulation.
  • Any new criteria should apply only to new applicants, to avoid controversy and criticism from those currently receiving benefits. However, better investigation of current beneficiaries and targeted disability reviews will help ensure that those who are legally disabled are the only ones receiving benefits.

CONCLUSION

Due to its impending insolvency, SSDI must be reformed, and this reform should include the elimination of the medical-vocational grid. The disability insurance program is going bankrupt because it is too easy for certain applicants to qualify for benefits: those who are over age 50, don’t speak English, or have less than a high school education. The current guidelines are designed for conditions that existed decades ago, not for the economy and workers of today.

Disability Claim Denied? Find the Right Judge

Sunday, March 8, 2015
Authors: 
Mark J. Warshawsky

To all parties involved in a trial, the slam of a gavel should indicate that justice has been served. Unfortunately, this is often not the case with Social Security disability appeals. A system designed to serve society’s vulnerable has morphed into a benefit bonanza that costs taxpayers billions of dollars more than it should. The disability trust fund will become insolvent in 2016, and Congress would be wise to begin much needed reform.

A disability applicant whose claim is rejected during the Social Security Administration’s first two stages can appeal the decision to administrative-law judges. These judges must impartially balance the claims of the applicant against the interests of taxpayers.

Over the past decade judicial impartiality has declined significantly, as many administrative-law judges uncritically approve most claims. In 2008 judges on average approved about 70% of claims before them, according to the Social Security Administration. Nine percent of judges approved more than 90% of benefit requests that landed on their desks.

Do nine out of every 10 applicants appealing denied claims need societal support? There are reasons for skepticism. The data show that judges who are generous in granting benefits are consistently generous over time—which is suspicious, since each year they should hear a random set of new cases. The more discerning judges—those who award benefits less than 90% of the time—are more unpredictable from year to year.

Former Social Security Commissioner Michael Astrue, who took office in 2007, made much-needed changes. Incompetent incumbents saw their influence diluted by new judges drawn from fresh candidate lists. Judicial decisions are now randomly reviewed to ensure that the court remains impartial and fair to taxpayers. Judges were limited to hearing 1,000 cases a year (the figure has since been lowered to 700), and individuals are allowed only one disability application at a time.

Mr. Astrue’s reforms have produced good results. In 2011 judges with award rates exceeding 90% heard a mere 4% of all cases, a 63.6% decline from 2008. But Mr. Astrue’s term expired in 2013, and these changes can easily be undone, either intentionally by future administrators, or unintentionally as bad habits slip back into the system.

Continue reading