Unemployment Insurance and Disability Insurance in the Great Recession

...SSDI applications do not appear to respond to UI exhaustion.

At the end of 2012, 8.8 million American adults were receiving Social Security Disability Insurance (SSDI) benefits. The share of the American public receiving SSDI has more than doubled since 1990. This rapid growth has prompted concerns about SSDI's sustainability: recent projections suggest that the SSDI trust fund will be exhausted in 2016.

SSDI recipients tend to remain in the program, and out of the labor market, from the time they are approved for benefits until they reach retirement age. This means that if unemployed individuals turn to disability insurance as a source of benefits when they exhaust their unemployment insurance (UI), the long-term program costs can be substantial. Some have suggested that the savings from avoided SSDI cases could help to finance the cost of extending UI benefits, but little is known about the interaction between SSDI and UI.

In Unemployment Insurance and Disability Insurance in the Great Recession, (NBER Working Paper No. 19672), Andreas Mueller, Jesse Rothstein, and Till von Wachter use data from the last decade to investigate the relationship between UI exhaustion and SSDI applications. They take advantage of the variability of UI benefit durations during the recent economic downturn. The duration of these benefits was as long as 99 weeks in 2009, remained protracted for several years, then was shortened substantially in 2012. The authors focus on the uneven extension of UI benefits during and after the Great Recession to isolate variation in the duration of these benefits that is not confounded by variation in economic conditions more broadly.

The authors find very little interaction between UI benefit eligibility and SSDI applications, and conclude that SSDI applications do not appear to respond to UI exhaustion. While the authors cannot rule out small effects, they conclude that SSDI applications do not respond strongly enough to contribute meaningfully to a cost-benefit analysis of UI extensions or to account for the cyclical behavior of SSDI applications.

The authors suggest that the tendency for the number of SSDI applications to grow when the economy is weak may reflect variation in the potential reemployment wages of displaced workers, or changes in the employment opportunities of the marginally disabled that influence the evaluation of an SSDI applicant's employability. These channels are not linked to the generosity or duration of UI benefits, and they imply that more stringent functional capacity reviews of SSDI applicants may not reduce recession-induced SSDI claims if these claims reflect examiners' judgments that the applicants are truly not employable in the existing labor market.

--Les Picker