Unemployed to the point of disabled?

November 19, 2010: 10:49 AM ET

One of the lesser-noticed realities of America's jobless problem is the surge in people applying for disability insurance.

Disability

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Like it or not, when times get tough, Americans tend to turn to the government for help. More people file for disability claims whenever the economy suffers a setback, but the implications this time around could be much greater than previous downturns as high unemployment is expected to linger for years to come.

In fiscal 2010, applications for disability insurance totaled 3.2 million, up from 2.6 million amid the height of the recession in 2008, according to the U.S. Social Security Administration, which administers and approves applications. High unemployment and anemic economic growth has been a key factor, agency officials say. What's more, the percentage of applications approved since 2008 has roughly stayed steady at about 35% to 37%.

It's not as if more Americans suddenly become disabled when the economy goes sour. In a way, the cyclical rise illustrates the scale of joblessness and a federal disability program that essentially functions more like a long-term unemployment program for the "unemployable," says David Autor, economist at Massachusetts Institute of Technology.

This doesn't mean there's rampant fraud going on, although there might be some of that. The program hinges not just on personal health but also on employability. The benefits go beyond unemployment insurance -- it includes medical benefits as well.

For more than two decades, the number of people receiving disability insurance benefits has grown substantially – mainly following congressional reforms in 1984 that liberalized the disability screening process. It made benefits much more accessible to workers with non-life threatening disorders, such as mental illness and back pain.

The costs are huge, potentially posing financial risks to the finances of the disability insurance program at the Social Security system at large. The administration expects the program to cost $127 billion in fiscal 2010, up from $118 billion last year. Since 1985, the fraction of Social Security spending for disability insurance rose from 10% to 17% and the payroll tax devoted to the program increased from 1.0% to 1.8%, Autor wrote with University of Maryland economist Mark Duggan in 2006 called The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding.

At issue isn't necessarily who deserves to be on disability -- the program would probably need to restructure in order seriously control costs. What's more worrying is the historical relationship between unemployment and disability. When joblessness rises, disability typically increases as well. And with unemployment predicted to be stubbornly high for at least the next couple of years, this surely will add to the government's already substantial burden.

Once enrolled in disability insurance, few people actually get off the program, which has no real time limits. Most stay in the program until they reach retirement age, so whatever increase the agency sees during the current economic downturn probably won't fall, at least not anytime soon. Autor and Duggan point out that whereas exit from disability insurance stood at 12.1% in 1985, the percentage has steadily dropped, reaching 7.2% in 2004.

Autor, who has updated the 2006 paper and is expected to present findings before a congressional committee next month, says the downward trend has continued today.

Though scars eventually heal, high unemployment will leave a mark in the US economy. This is just one that deserves some attention.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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