Wednesday, July 25, 2012

Social Security Disability Insurance Reality One: At the National Level Disability Is Unemployment Insurance By Another Name

What’s Old Is New and What’s New is Old

My first exposure to disability insurance was building simulators (mathematical models) for a few states’ Temporary Disability Insurance (TDI) funds.  It was long ago, back when states took funding their trust funds seriously. The TDI funds were added as an afterthought to a project to build simulators for selected states’ Unemployment Insurance (UI) funds.
The UI simulator was quite simple.  As expected, unemployment was the primary explanatory variable and the only one useful for forecasting.  The historical analysis showed the impact of shifts to industries that were less cyclical and seasonal.  However, their effect was minor and dependent on how industry mix was measured.

What was surprising was that TDI claims paralleled UI claims.  Unemployment was the primary explanation for cycles in TDI claims.  Although the cycles were milder, clearly at the aggregate level, claiming disability was a response to a weak labor market. 

More telling was a trend in the frequency of TDI claims.  Although not a steep increase, there was a statistically significant increase in the frequency of claims.  Neither changes in labor force participation rates nor industry mix seemed to explain the trend.  In fact, the states involved were actually attracting industries with lower injury rates.  Casual inspection of the TDI data gave the appearance that each cyclical downturn produced about the same increase in claims when adjusted for their severity, but recoveries didn’t produce as large a decline in claims. One would almost believe rehabilitative medicine had taken a step backward. 

So, “long, long ago in a galaxy far, far away” it was apparent that, at the aggregate level, disability was driven by economics, not physical condition.  It’s still true and politicians know it.  How politicians respond explains the trend. That will be tomorrow's focus.

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