Prepared Statement By Jane Ross Deputy Commissioner For Policy
Social Security Administration
Disability Options In The Private Sector
Before The House Budget Committee Tuesday,
June 22, 1999
Mr. Chairman and Members of the Task Force: Thank you for inviting me to discuss the Social Security Disability (SSDI) program and whether private insurance, by itself, can provide the same degree of protection to all working Americans at the same low cost. In my statement today, I will outline the scope and purpose of SSDI, and the cost and value of coverage. Then I will discuss the two types of insurance now provided by the private sector to deal with disabilities: first, workers compensation which applies only to disabilities caused by work, and second, private disability plans that apply to any disability.
Social Security Disability
The Social Security system as a whole operates as a social insurance program. That is, Social Security spreads the cost of protection against the risk of lost income due to retirement, death, or disability over the entire working population, with more protection, per dollar earnings, for lower paid workers and for workers with dependents. Consequently, the value of benefits for any given worker depends on his or her individual circumstances-- earnings level, marital status, dependent children, years in the workforce, and age at disability or death. Like Social Security in general, the SSDI program provides an extra measure of protection for lower-wage workers. Due to the progressive nature of the program, the benefits formula replaces a greater percentage of preretirement earnings for lower-wage workers than higher-wage workers.
Largely absent from the current public debate is the fact that about one third of Social Security beneficiaries are not retirees or their dependents. They represent severely disabled workers, their children, or the surviving family members of workers who have died. Social Security pays benefits to more than 4.7 million disabled workers, nearly 1.5 million children of disabled workers, and almost 200,000 spouses of disabled workers. Because about 25 to 30 percent of today's 20-year olds will become disabled before retirement, the protection provided by the SSDI program is extremely important. This is especially true for young families often straggling to afford adequate private insurance. For a young, married, average worker with two children, Social Security is the equivalent of a $233,000 disability income insurance policy. In addition, SSDI benefits, like retirement benefits, are adjusted for inflation, so that the value of the benefit is maintained over time. Disabled workers and their dependents received $47.6 billion in cash benefits under the Social Security program in fiscal year 1998.
Furthermore, SSDI benefits are the gateway to the Medicare program to those individuals who have been eligible for disability benefits for 24 months. These benefits provide health care coverage that to many SSDI beneficiaries is simply irreplaceable, since many would not be able to obtain insurance in private markets simply because they are already disabled. The Medicare program paid over $24 billion in benefits in fiscal year 1998 to individuals whose entitlement to Medicare is based on their SSDI benefits. Thus, about $72 billion was paid in fiscal year 1998 from the Social Security and Medicare programs on behalf of disabled workers and their families.As with the retirement program, SSDI is funded through a payroll tax on covered earnings, paid by employees, their employers, and the self-employed. The current payroll tax on earnings is 0.85 percent for employees and employers, each, and 1.7 percent for the self-employed.
SSDI is designed to protect workers covered under the Social Security program who become severely disabled, and it strives to ensure that applicants are judged on the basis of a uniform set of standards. The criteria we use to award disability benefits requires that the condition either be expected to result in death or last at least 12 months. To qualify, the individual must be unable to perform any substantial work in the national economy because of a medical condition. Thus, the inability to do one's own past work or the inability to find suitable employment are not a sufficient basis for meeting the definition of disability. Additionally, applicants must have worked 20 quarters during the 40 quarter period ending with the quarter in which disability began (special provisions apply for workers who are under age 31), and they must complete a 5-month waiting period after the onset of the disability.
After a claim is taken in one of Social Security's field offices, it is forwarded to one of the State Disability Determination Services. These state employees are responsible for following up on at least one year's worth of medical evidence in support of the claim, scheduling consultative examinations if necessary, and making the disability determination at the initial and reconsideration (the first level of appeal of an adverse initial determination) levels. The States are fully reimbursed for making these determinations. The process of evaluating an individual's disability accounts for the administrative costs for the disability program being somewhat higher (3.3 percent of benefits) than those for the retirement and survivor program, largely because of the cost of obtaining medical evidence and the need for a thorough evaluation by a physician or other highly trained professional reviewer.
While the Social Security eligibility criteria are very strict, we also have a very structured system to ensure that applicants' rights are protected and that those applicants who are eligible, actually get their benefits. Currently, a physician must be part of the decisionmaking team, although we are testing a system where certain claims, generally the most severe and obvious cases, would be decided by a trained layperson. After a reconsideration denial, a claim can be appealed to an administrative law judge, then the Appeals Council and up to a federal court. We also are testing a model, which would streamline the process by eliminating the reconsideration step.
While the primary purpose of SSDI is to replace a portion of income, the program also includes provisions designed to encourage beneficiaries to return to work. Even when individuals have significant disabilities, with appropriate support and vocational rehabilitation (VR), they may be able to work again. The primary mechanism that is used by Social Security to help people return to work is the referral of beneficiaries to State vocational rehabilitation services. I would like to mention at this time the Administration-proposed legislation in 1997 that called for a Ticket to Independence program that would further our efforts at rehabilitation by introducing the concept of consumer choice in obtaining employment services. Similar legislation overwhelmingly passed in the House in 1998 and has now evolved into the Work Incentives Improvements Act that passed the Senate by a vote of 99 to 0 on June 16, 1999. The President's budget provides full funding support for this legislation.
I would like to turn now to a discussion of the range of workers compensation and private disability benefits available.
While SSDI covers workers with severe disabilities regardless of how the disability was developed, the workers' compensation (WC) system is designed to provide reimbursement for lost wages and medical expenses for workers who become disabled as a result of an on-the-job injury. WC laws were first enacted in the early 1900s and now separate programs are provided in each of the 50 States and the District of Columbia.
Virtually all employers are required to secure their compensation liability either through private insurance, by self-insuring, or by membership in a State fund. Employers who secure their compensation liability are protected from other liability that could arise because of injuries to their employees.
One of the primary goals of an effective WC program is to restore the injured workers to their previous employment, and thus the programs emphasize medical and vocational rehabilitation. Other benefits include weekly payments that are based on the degree of disability sustained as a result of the injury, and such medical care as the nature of the injury or process of recovery may require. Benefit payments totaled $42.6 billion in 1996.
Workers compensation is not a stand-alone system. It is the first payor, but integrates with Social Security. In most States if workers go on the Social Security disability rolls, the Social Security payment is reduced, so that the combined Social Security/workers compensation amounts are limited to 80 percent of pre-disability earnings.
Employer-Provided Private Disability Insurance
Modern-day private disability insurance grew up in a climate that already included Social Security and other public benefits such as VR and WC. As a result, these private plans assumed the existence of Social Security and were tailored to integrate with it. There are many different types of private disability insurance plans. While they fall under two general categories, short-term and long-term, there are many variations. About twothirds of long-term plans are employer-sponsored, and about one-third of plans are individually purchased. Further adding to the variety are the differing definitions and provisions within the plans; there is no standard terminology.
The definitions of disability within the types of plans vary to some extent, but they generally share major characteristics. Short-term disability plans typically include payments for short-term impairments as well as pregnancy. Employer-sponsored longterm disability plans usually have a more lenient definition of disability for the first two years, after which the definition becomes more stringent. Generally, the initial definition is the inability to perform the employee's usual occupation. After two years, the definition usually requires the employee to be unable to perform any occupation, similar to the social security definition. Finally, while there are exceptions, most individually purchased plans define disability as the inability to perform one's usual occupation for the entire benefit period-- generally to age 65. While SSDI benefits are limited to age 65 as well, the individual begins receiving retirement benefits on attainment of age 65, and the conversion from disability to retirement benefits is invisible to the beneficiary.
Short-term disability and long-term disability plans serve different purposes and have different provisions. Generally, short-term disability plans refer to a formal plan in which benefits begin after sick pay has expired, though benefits may be in lieu of sick pay. Based on Bureau of Labor Statistics (BLS) data, nearly 34 percent of full time private sector plus State and local government workers in this country have some type of short-term disability plan.t Short-term disability plans usually replace from 40-70 percent of earnings, but can replace earnings entirely. Benefit periods range from 30 days to 6 months, though some plans have terms of up to 24 months. Ninety percent of employees return to work within 8 weeks, often because the impairments covered are not severe, e.g. recovery from surgery. Because of the short-term nature of most short-term disability impairments, there is little connection between short-term disability plans and Social Security. Ideally, employer sponsored long-term disability plans begin paying when short-term disability benefits end. The earnings replacement rate for these longterm disability plans is about 60 percent of pre-disability earnings, up to a maximum dollar amount.
Only one third of full-time workers currently have employer-sponsored long-term disability plans.2 The following chart shows the percentage of employees of state and local government, small firms (under 100 employees) and medium/large firms with employer sponsored long-term disability plans by category of occupation.3 It is worth noting that employees with the most arduous jobs--those who presumably need the protection the most--are less likely to have long-term disability plans.
Long-term plans can provide both cash benefits and rehabilitation services. They screen their beneficiaries with a view toward rehabilitation, and decisions on what benefits to provide often turn on the cost of rehabilitation vs. the cost of benefits, in addition to job availability. Many larger employers use disability management strategies including early intervention and partial or residual benefits to encourage return to work.
In determining cash benefit levels, employer-sponsored long-term disability plans usually are integrated with Social Security and WC. Those employees who meet the Social Security definition of disability are encouraged or required to apply for Social Security benefits. In fact, insurers and employers count on the integration of their plans with Social Security; long-term disability benefits are generally offset--reduced--by Social Security benefits.
Individually Purchased Disability Insurance
Individual disability plans are thought to be a small part of the private market although there is a lack of data on the actual extent of coverage. However, experts believe participation is quite limited because they tend to be very expensive. Participation is mostly limited to highly compensated employees or self-employed individuals. These plans may replace up to 80 percent of earnings, though more typical replacement rates are 60-70 percent. Often, payments of these plans, in contrast to employer-sponsored longterm disability plans, are not reduced by Social Security or other programs.
Costs of Coverage
Perhaps the most useful approach in examining the cost of private disability insurance is viewing it in terms of value to the beneficiary. This value can be determined by looking at the proportion of the premium dollar that is returned as benefits to policyholders. We can determine this proportion by looking at the cost structure of companies, although they vary from company to company. One major insurer estimated costs as shown on the following chart. It should be noted that only 45 cents of every premium dollar is returned to beneficiaries.'* Claims processing costs account for about 3 percent of this category.
Clearly it is difficult to compare private and public sector costs since the enterprises are so different. As previously noted, Social Security disability administrative costs are about 3 percent of disability payroll taxes. It would be tempting to conclude that the private sector costs are similar, since private sector claims processing costs in this example are estimated at 3 percent. But administrative costs are also embedded in other categories, such as acquisitions (which represents items such as underwriting and sales) and customer service (for instance, billing and other policy services). And the bottom line is that the Social Security system returned 97 percent of the money it takes in to beneficiaries while private firms return far less--as little as 45 percent of the money it takes in.
Access to Private Insurance Coverage
Because of the potential adverse selection risk to insurers, the disability income insurance market is heavily underwritten. Persons who are at higher than normal risk for becoming disabled, or whose income stream is not consistent over time, would likely be deemed uninsurable by the providers of private disability insurance. In this environment, it is highly unlikely that a market for private disability insurance would emerge to provide the same universal coverage available under SSDI.
Mr. Chairman, at the beginning of my statement I said that I would address the question "can private disability, by itself, provide the same degree of protection to all working Americans at the same low cost as SSDI?" The answer to that is obviously no. If private disability were to become a substitute for, rather than a complement to Social Security, its costs would be prohibitively higher, and not everyone would be allowed access to vital coverage. For example, Social Security benefits are paid to all workers who meet coverage and disability requirements; private insurers may exclude some people from coverage because they are at a higher risk of becoming disabled and therefore would be uninsurable.
Private disability insurance serves an important purpose in providing an additional degree of financial security for the minority of the workforce that enjoys coverage. However, the operative word is additional. Only Social Security provides coverage to all workers and dependents---coverage that is provided at lower cost and greater value than now available on the private market.
This concludes my remarks. I would be happy to answer any questions you and the other Task Force members might have.
1 BLS data used here include all full time US employees except Federal, agriculture, and private household workers
2 The same universe applies here.
3 It should be noted that for State and local, the professional/technical category includes teachers; for small establishments, white collar includes clerical/sales staff; for medium/large establishments, white collar includes clerical/sales and blue collar includes production/services.
4 The actual amount is somewhat less since claims processing costs also consume about 3 percent of this category.