Induced Entry Effects of a $1 for $2 Offset in SSDI Benefits

Abstract

This paper predicts the budgetary, behavioral, and welfare effects of a proposed change in the Social Security Disability Insurance (SSDI) program known internally within the Social Security Administration (SSA) as the for $2 benefit offs et, i.e. a reduction of $1 in benefits for every $2 in earnings an SSDI be neficiary earns above the substantial gainful activity (S GA) ceiling, currently equal to $860 per month. Currently SSDI beneficiaries lose 100% of their benefits if their earning exce ed the SGA ceiling after a nine month trial work period. Disability advocates argue that lowering this tax to 50% would significa ntly increase the incentives for SSDI beneficiaries who have full y or partially recovered from their disabilities to return t o work, and could actually reduce the cost of SSDI via induced exit from the program. However the U.S. government was concerned that the $1 for $2 offset makes SSDI more generous, and thus could actually increase costs via a combination of reduced exit from SSDI and induced entry into SSDI. A 1999 law signed by President Clinton, the Ticket to Work and Work Incentives Improvement Act, mandated the Social Security Security Administration (SSA) to undertake a demonstration project to evaluate whether the $1 for $2 offset would have a significant induced entry effect . The current SSA Commissioner, Jo Anne B. Barnhardt, cancelled the demonstration project, perhaps in response to high costs and serious methodological problems associated with implementing it. This paper provides an alternative a model-based evaluation and prediction of the impact of the $1 for $2 offset using a detailed, empirically calibrated version of the life-cyc le model. The model's predictions are consistent with the p redictions of the disability advocates, namely under the $1 for $2 offset a large fraction of SSDI beneficiaries eventually return to work. However, the model predicts that this work is only temporary and part time, and few of these beneficiaries will actually le ave the SSDI rolls. Furthermore the model predicts that induced entry will occur, although our estimates of the induced entry effect are lower than previous estimates by the SSA's Office of the Ac tuary, which predicted that SSDI rolls and costs would increase by approximately 6%. Our model predicts that the number of SSDI applications would increase by 2.2%, and SSDI rolls would increase by 3.2%. The mean duration of a typical beneficiary o n SSDI would also increase, from 12.7 years to 13 years, and the overall cost of the SSDI program would increase by approximately 4%.

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