The SSDI Program's Impact on Human Capital


Mar 8, 2013

a woman in bed using a laptop

Over the last two decades, the number of disabled workers receiving Social Security Disability Insurance (SSDI) benefits has nearly tripled. At the same time, the number of disabled people in the workforce declined from four disabled workers for every ten non-disabled workers to two disabled workers for every ten non-disabled workers. Unfortunately, the structure of the SSDI program itself has been a major force behind the decline in employment of disabled people.

To apply for SSDI benefits, people must stop working for at least five months—regardless of the extent to which they might be able to work. If a disabled individual is ultimately denied benefits, that individual may then return to the labor force, but by that time he or she may have lost additional work capacity—in the form of skill depreciation—while waiting for an SSDI decision.

To understand the extent to which SSDI adversely affects work capacity, researchers have generally used the post-decision employment rate of denied applicants, but this understates the total effect. A better calculation would consider the effect of receiving benefits as well as the effect of spending at least five months out of the labor market while waiting for the benefits.

Admittedly, not all applicants have residual work capacity: an estimated 57 percent are unable to work and will clearly qualify for SSDI. On the other hand, 20 percent have substantial work capacity and do not qualify for SSDI. The important demographic here is the remaining 23 percent of applicants who have some work capacity and may or may not qualify for SSDI.

Our estimates show that for that middle 23 percent, acceptance into the SSDI program reduces their employment substantially. Those who receive benefits may decide not to return to the workforce, even if their benefits are only a fraction of their previous income (by contrast, those who are denied benefits earn less than half of what they did before their disability).

To understand the total effect of SSDI, we must add the effect of skills lost through unemployment during the initial processing of a disability insurance application as well during any appeals process—a period that may last up to two years.

In sum, the combined effects of having potentially employable individuals receive SSDI benefits, and the loss of skills among those who are denied benefits, are significant. These applicants tend to be younger, have mental impairments, and very low prior earnings. If we could find effective early interventions to prevent the disability, then some of these real SSDI-induced losses in human capital could be avoided.

Nicole Maestas is a senior economist and director of the Economics, Sociology and Statistics Department at the RAND Corporation. Kathleen Mullen is an economist and associate director of the Center for Disability Research at the RAND Corporation.

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