Topic: Social Security

Lindbeck’s Law: The Self-Destructive Nature of Expanding Government Benefits

Relevant foresight from Swedish economist Assar Lindbeck, “Hazardous Welfare State Dynamics,” American Economic Review, May 1995:

The basic dilemma of the welfare state …  is that the more generous the benefits, the greater will be not only the tax distortions but also, because of moral hazard and benefit cheating, the number of beneficiaries. This is a field where Say’s Law certainly holds in the long run: the supply of benefits creates its own demand… .

Serious benefit-dependency, or ‘learned helplessness’, may … emerge only in a long-run perspective. Possible examples of such gradual adjustments are an increased tendency to apply for social assistance, less job search and greater choosiness among unemployed workers, more absence from work for alleged health reasons, more applications for (subsidized) early retirement due to alleged inability to work, and more time and effort devoted to tax avoidance and tax evasion.

P.S. A 2007 empirical study by Friedrich Heinemann supported Linbeck’s hypothesis, finding that “transfer expansion or increasing unemployment tend to be associated with a larger readiness of the country’s population to cheat on benefits.”

Disability Overpayments

CNN.com has an article today on disability overpayments made by the Social Security Administration ($1.3 billion over two years according to a recent Government Accountability Office report). Although people often associate government overpayments with fraud, often times it’s just bureaucratic bungling. 

Take for example this fellow who tried to do the right thing. In fact, he’s still trying: 

One 33-year-old veteran began receiving Social Security disability payments after his left foot was amputated following an explosion in Iraq in 2007. After going through rehab for his prosthetic leg, he began working full-time for a defense contractor in 2009. As soon as he started collecting a paycheck, the veteran, who asked to remain anonymous, reported his roughly $100,000 annual salary to the Social Security Administration. 

When recipients of disability benefits reenter the workforce, they have a nine-month trial period in which they continue to receive benefits. Once the trial period ends and their earnings exceed a certain level – currently $1,040 a month – the payments are supposed to stop. And that’s exactly what happened in his case. 

But then, last July, he noticed a $75,000 deposit in his checking account. Three days later, a letter arrived from the Social Security Administration saying it had reinstated his benefits because he had not been “gainfully employed” during the past three years. 

He called the agency and was told the mistake would be investigated. Finally, in November, he was notified that the benefits he received were indeed a mistake and he must repay the agency. But, oddly, the amount requested was a few thousand dollars less than the $75,000 overpayment he had received. 

Worried he’d be accused of defrauding a federal agency, he filed an appeal – which he was later told had been lost. His second appeal is still pending. While he hasn’t had to pay any interest on the overpayments, he has had to pay more than $23,000 in income tax on that additional “income.” 

Yes, it’s just one story and millions of Americans receive accurate payment for benefits that they are legally entitled to. But as I discuss in a paper on Social Security Disability Insurance, the program is collapsing under its own weight. Indeed, at the same time this veteran is fighting to give the money back, the SSA is “properly” paying out disability benefits to… an “adult baby.”

Senate Committee Hearing on Disability Fraud

On Sunday, CBS’s 60 Minutes profiled Sen. Tom Coburn’s (R-OK) on-going investigation of fraud and abuse in the federal government’s two main disability programs: Social Security Disability Insurance and Supplemental Security Income (see Chris Edwards’ discussion here). Yesterday, the Senate Committee on Homeland Security & Governmental Affairs (Coburn is the ranking member) held a hearing on a particularly egregious example centered on the Social Security Administration’s Huntington, WV office. 

The case is a perfect example of what is quickly becoming known as the “disability-industrial complex”: specialty law firms overwhelming the system with dubious disability claims, doctors vouching for applicants with dubious claims, and federal administrative law judges awarding disability benefits to individuals with dubious claims.

 

The committee produced a 160+ page report that is jaw-dropping from beginning to end. If you’re pressed for time, at least check out the “findings” on pages 4-7. In the Huntington case, it’s pretty clear that the three points of the triangle were all in cahoots. It’s also quite similar to a still unfolding disability scandal in Puerto Rico that I discussed in August. In both cases, the public is now aware of the scandals thanks to the Wall Street Journal’s Daniel Paletta’s excellent investigative reporting. That begs two questions, however: what other major disability scandals are sitting out there waiting for a curious reporter discover? And what other ticking time-bombs are Social Security Administration bureaucrats aware of but doing little to defuse? 

Close Washington to Dismantle the Welfare-Warfare State

The GOP is attempting to defund ObamaCare by holding the federal government hostage.  Congressional Republicans say:  Cut the spending or Uncle Sam will have to stay home. 

Unfortunately, while the public doesn’t favor President Obama’s plan to nationalize American health care, people seem even less enthused about Republican tactics.  Better would be a threat to close down the government because the government should be shuttered.  The GOP should seek to eliminate entire programs and agencies. 

Federal control of health care is a good place to start.  The U.S. medical system is a mess, but the government should not decide who gets how much health insurance in what form through whom. 

Moreover, as I wrote in Forbes online:

Corporate welfare should be another target.  Republicans rightly worry about perverse incentives created by welfare for the poor since federal programs have wrecked families and communities while discouraging education and work.  However, even less justified are a variety of payments to dependent businesses.  Export subsidies, research grants, farm subsidies, housing aid, regulatory preferences, and more.

There’s no better reason to underwrite smaller enterprises, through the Small Business Administration.  Is there really a critical scarcity of liquor stores requiring taxpayers to pay for additional ones? 

Some tasks, such as the Department of Housing and Urban Development, just aren’t Washington’s job.  Worrying about the construction of apartments and homes should be left to localities and states. 

Another unnecessary bureaucracy is the Department of Education.  The national government shouldn’t be trying to run local schools.  And why should lower-income taxpayers subsidize middle-class kids who want to become lawyers?

Grant the federal government authority to create parks involving uniquely scenic or otherwise special lands.  There’s still no reason for the Interior Department to own and manage hundreds of millions of acres of forest and range land. 

The Department of Defense possesses—at the sufferance of foreign governments—hundreds of properties abroad.  While maintaining cooperative relationships with foreign militaries as well as access to some of their bases is useful, the U.S. has no need for innumerable facilities and garrisons around the globe.  The U.S. should act as a back-up against the rare hegemonic threat that friendly states could not handle rather than the guardian against every mundane controversy and conflict that arises elsewhere.

Foreign facilities often are justified as logistical way stations for intervening in the Middle East or Central Asia.  However, Europe should provide the troops as well as the bases to deal with such hot spots as Egypt and Syria.  It would not be isolationism for America to more humbly and prudently engage the world.

Foreign aid should go the way of military intervention.  Even humanitarian assistance can have counterproductive impacts, while economic assistance has been a grand failure, doing more to subsidize debilitating collectivism than promote economic reform. 

There’s much at the Justice Department that should be eliminated.  Federal criminal law has exploded.  In some cases Congress makes crimes out of actions that should be left to civil punishment—environmental disputes, for instance.  Federal lawyers also have become the vanguard of political correctness, enforcing a racial spoils system under the guise of promoting affirmative action.

Other federal sacred cows also deserve challenge.  The Drug Enforcement Agency arrests people because they prefer to get intoxicated with drugs rather than alcohol.  There are scores of welfare and job training programs of dubious effectiveness.  If Washington moved from the income to a consumption tax, the IRS would be smaller and much less intrusive. 

While many people are criticizing Republicans for threatening to close the government over ObamaCare, there actually is good reason to go to the brink on shrinking the American Leviathan.  Washington meddles in Americans’ lives far more than the Founders ever imagined—and circumstances ever justified.  It’s time to reverse the process and really shut down government.

60 Minutes Disability Investigation

The abuse and overspending in government disability programs is so bad that even National Public Radio and 60 Minutes have taken notice. On the heels of this excellent NPR examination of the “disability industrial complex,” the venerable CBS news show last night profiled Senator Tom Coburn’s efforts to uncover fraud in the two big federal disability programs.

The combined spending on Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) has risen to a huge $200 billion a year, so kudos to the mainstream media for sounding the alarm on these programs. What we need now is for other fiscal conservatives on Capitol Hill to stand with Senator Coburn and demand reforms.

There appear to be millions of people on the disability programs whose ailments are not actually severe enough to warrant coverage or who are outright scamming the system.  On 60 Minutes, Senator Coburn guessed that one-quarter or more of the people currently on the disability programs shouldn’t be. The following chart (sourced here) from Tad DeHaven supports Coburn’s assessment:

During the 1970s and 1980s, the ratio of people on SSDI to the U.S. workforce averaged 3.4 percent. That ratio has now more than doubled to 7.4 percent, even though the actual rate of disability among the working-age population is thought not to have increased in recent decades.

The following chart illustrates the problem from another angle. It uses data compiled by Jagadeesh Gokhale from the Current Population Survey on men aged 20 to 59 with a work-limiting health problem. Within this group, a falling share are working and a rising share are going on SSDI and not working.

As DeHaven explains in his recent reports on SSDI and SSI, the rapid growth in these programs is very troubling, and not just because of the rising taxpayer costs. The programs are apparently inducing many people who could be using their skills productively in the economy to instead drop out and go on the federal dole.

All government subsidy programs undermine individual responsibility and induce unproductive behaviors. This is true, for example, of the roughly $30 billion in annual federal subsidies for farm businesses. Each year federal disability programs pump out six times more benefits than farm subsidies, so it wouldn’t be surprising if the distortions and economic harm created is far larger.

SSDI (Problems) in the News

My recent paper on the rising cost of Social Security Disability Insurance is proving to be timely. 

First, the Washington Post’s Michael Fletcher provides a good overview of SSDI’s “issues.” Fletcher highlights a Maine county where the disability rolls have jumped as the local paper mills have shed jobs. That’s because the program has become a quasi-unemployment program, a problem that’s been exacerbated by the economic downturn. One former mill worker who said that he would rather be working now collects disability and “spends a lot of his free time riding his Harley-Davidson motorcycle to bike rallies around New England.” 

Second, The Economist points to research that suggests that SSDI is contributing to a reduction in the labor force participation rate: 

These results suggest that if it were not for people receiving disability insurance, reported unemployment would be far higher. Although DI recipients may initially have climbed because the economy was weak, their numbers will almost certainly not decline when it strengthens again; only 4% of beneficiaries return to work within ten years. The proportion of working-age adults on DI has risen from 1.3% in 1970 to 4.6% in 2013. The impact on participation rates may be cyclical at first and then become structural.

Third, a new Government Accountability Office report estimates that the Social Security Administration paid out $1.3 billion in benefits over two years to individuals who probably shouldn’t have received them. I should caution, however, that although fraud is an inherent problem with federal disability programs (and an improper payment doesn’t necessarily mean fraud was involved), it’s abuse of the system that is the bigger problem–i.e., people legally qualifying for benefits who arguably shouldn’t. 

But yes, fraud certainly exists and that leads to the fourth story. In June, a former Democratic state representative in Missouri pled guilty “to illegally taking $58,816 in federal disability payments while he was working as a state legislator earning $30,000 a year.” Ah, there are so many wisecracks to be made here, but I’ll just go with one: A politician stealing taxpayer money is illegal? Who knew!  

Social Security Disability Fraud in Puerto Rico

In 2011, the Wall Street Journal’s Daniel Paletta reported on the rapid growth in individuals applying for and receiving Social Security disability benefits. Paletta found that Puerto Rico had become a particularly easy place to obtain benefits. Officials with the Social Security Administration (SSA) absurdly claimed that nothing was amiss. 

It looks like the SSA is about to get some egg on its face. 

Yesterday, Paletta reported that federal investigators, including the FBI, raided doctors’ offices in Puerto Rico as part of a widening probe into disability fraud on the island. A doctor’s opinion that an individual is suffering from a disability is naturally quite helpful in convincing examiners and judges that benefits are warranted. Investigators are apparently looking into whether Puerto Rican doctors are being paid to document that applicants are disabled. From the article: 

In 2006, just 36% of initial applicants in Puerto Rico were awarded benefits. In December 2010, the award rate had jumped to 69%. By 2010, nine of the top 10 U.S. ZIP Codes for workers receiving disability benefits were on the island. 

At the time, SSA officials said the high number of recipients and the high award rate was due to the island’s weak economy and a lack of adequate health care for workers. 

The program is overseen by the Social Security Administration in Baltimore, but each state and territory is responsible for performing an initial screening to determine eligibility. Social Security officials said in 2011 that Puerto Rico had rigorous standards and a virtually nonexistent error rate. 

The characteristics of Puerto Rico’s beneficiaries differed from other areas. In addition to the large clusters in certain zip codes, federal data showed that 33.3% of Puerto Rican beneficiaries qualified because of “mood disorders,” a rate that is at least 10 percentage points higher than any U.S. state. 

Disability examiners and federal judges say mental disorders are harder to measure and often rely on medical opinions issued by doctors to make a determination. 

SSDI was designed as a way to provide benefits for people who can’t work because of mental or physical health problems, and Americans can qualify for benefits because of ailments ranging from severe back pain to terminal cancer. 

A lifetime of benefits, including access to Medicare, can cost the government about $300,000 a person. 

As I noted in my recent paper on the growing cost of Social Security Disability Insurance, the SSA’s inspector general says that “fraud is an inherent risk in SSA’s disability programs.” But as my paper explains, the problems with the program go way beyond outright fraud: 

Given the subjective and convoluted nature of determining SSDI eligibility, it’s likely that erroneous and unjustified payments are far larger in volume than just outright fraud. The huge, complex, and difficult-to-audit system is a perfect breeding ground for awarding and continuing benefits to people who shouldn’t be on the disability rolls.