Disability reform works – Australia and Europe Prove

In the remainder of this paper we consider how the reform experiences in Australia, Great Britain, the Netherlands, and Sweden can inform U.S. policymakers tasked with ensuring DI’s fiscal sustainability. First and foremost to effectively design policies to curb disability recipiency rate growth, policymakers have to acknowledge why it is growing. A large body of research has shown that in advanced industrialized economies with large and complicated safety nets, both exogenous factors—population demographics, population health, or economywide shocks–and endogenous factors—changes in eligibility rules, benefit replacement rates, or access to other social programs–can influence disability recipiency rate growth. The disability reforms undertaken in the Netherlands, Sweden and Great Britain were possible once these countries acknowledged that changes in behavior rather than changes in health were driving program growth. By recognizing that their policy designs influence behavior and program outcomes, policymakers opened the door to more fundamental disability policy changes. Importantly, this acknowledgement also allowed policymakers to rethink their national disability scheme’s goals and bring them more in line with modern notions of disability. This meant discarding terminology and criteria of incapacity and replacing them with a focus on ability. More than just semantic window dressing the new Burkhauser et al. IZA Journal of Labor Policy 2014, 3:4 Page 22 of 30 http://www.izajolp.com/content/3/1/4 terminology changed people with impairments expectations from dependence on disability benefits based on not working to work. Of course, for some individuals work was not possible, but this increasingly became the exception rather than the norm. As the previous section demonstrated, each nation implemented reforms slightly differently, but all shared the goal of curbing unsustainable program growth by changing the culture and social expectations of and for people with disabilities and better aligning the incentives embedded in program design with these expectations. The data show the reforms have generally been successful. Although each of the nations recognize their reforms have not been completely successful, from the U.S. perspective these reforms demonstrate that policies matter and provide a relevant starting point for discussions about reforming the U.S. system. Below we provide the four lessons most relevant to U.S. policymakers. Lesson 1. Disability does not mean incapacity Although disability is frequently thought of as an immutable, health-based condition that limits functionality and prevents the performance of socially expected tasks (such as attending school or working), modern notions of the productive capacity of all people is at odds with this characterization. A more accurate concept of disability, and one embodied in the U.S. Americans with Disabilities Act (ADA) and the World Health Organization’s (WHO) International Classification of Functioning, Disability, and Health (ICF), considers disability to be the product of an interactive process between an individual’s health conditions and the social and physical environment. In this perspective, disability is neither immutable nor determined solely by health. Each of the European countries we reviewed embrace this idea. Ensuring that their citizens with disabilities have the opportunity to work in the paid labor market is now a government priority19. Key among the findings based on their successful efforts to reduce their disability recipiency rates is that a substantial share of people who were moving onto the long-term cash transfer disability programs were, with reasonable levels of support, able to find or maintain employment. Of course, a subset of workers with disabilities have impairments so severe that work is not possible, but this has proven to be a smaller portion than previously accepted onto these programs. And those now coming onto the rolls are, by demonstration rather than assumption, unable to integrate effectively into the labor market even with appropriate incentives and support20. This design offers an important advantage over programs based on categorical determinations of disability that can expand in unintended ways when individuals are incentivized to change their behavior (i.e., attempt or not attempt to work) to become eligible. The lesson for U.S. disability policy is that the population with disabilities is heterogeneous and many of its members can work. This view is at odds with the current U.S. system in which the Social Security Administration (SSA) requires applicants to demonstrate an inability to perform substantial gainful activity before receiving access to benefits or any other type of support, including work support. Embracing the ideas of many European countries about the work capacity of individuals with disabilities calls for restructuring the U.S. system to bring forward the focus on employment and make long-term cash benefits a last-resort option once rehabilitation and accommodation had failed. Burkhauser et al. IZA Journal of Labor Policy 2014, 3 Lesson 2. Incentives affect behavior Once it is recognized that the social and cultural environment faced by individuals with impairments partly determines the extent to which their impairment limits them, it is easy to see that the incentives embedded in policy design can affect outcomes. The important lesson from the reforms in our sample of countries is that it is important to correctly incentivize all actors in the process to attain the outcomes desired. In the Netherlands, this meant making employers bear more of the direct costs of the program and making employees comply with rehabilitation and retraining in order to maintain benefits. In Sweden this meant standardizing the disability screening process and holding disability gatekeepers accountable for engaging applicants in work rehabilitation plans. Sweden also mandated that employers document how they had attempted to accommodate impaired workers. Finally, reforms focused on making workers comply with the work-first approach by reducing or eliminating benefits to those workers who did not comply with the rehabilitation and accommodation plans. Great Britain has similarly made employers responsible for paying sickness benefits for the first 28 weeks of a claim, has standardized the disability screening process, and has made it increasingly difficult to remain passively on long-term disability benefits without engaging in work-related activity. Reforms have also sought to address financial incentives related to imbalances in replacement rates between disability benefits and other welfare benefits. In Australia, most recently (since 2011) it has meant implementation of a new disability benefit assessment procedure, under which eligibility for benefits typically requires evidence that claimants were unable to obtain employment through vocational rehabilitation or other employment services over a period of up to two years, during which time claimants receive NSA and associated support services. The lesson for U.S. policymakers is that program incentives affect how people with disabilities and their employers react to, and fare after, the onset of a health impairment. In the U.S., DI is funded from a payroll tax and the federal government is responsible for a great share of the costs associated with providing long-term disability benefits to working-age people with disabilities. Because employers bear no direct responsibility for funding benefits paid to former employees, employers have no direct financial incentive to accommodate and rehabilitate employees who become impaired. Incentivizing employers to make greater investments in accommodation and rehabilitation by creating a scheme that makes employers internalize some or all of the costs of moving employees onto long-term disability could curb DI growth by more effectively aligning incentives. Autor and Duggan 2010 and Burkhauser and Daly 2011 propose two different models for doing this in the U.S. As the reforms in these countries show, incentives cannot be changed solely for employers. Incentives for people with disabilities and program gatekeepers also need to be aligned with program goals to realize sizeable and lasting reductions in disability recipiency rates. Lesson 3. Early intervention reduces flows—stocks are harder A recurring theme in the experiences of Great Britain, the Netherlands, and Sweden is that reforms focused on early intervention can be very successful at reducing the flow of new beneficiaries onto the program and/or boosting the flow of new beneficiaries off the program. For example, early intervention that coordinated employer actions with Burkhauser et al. IZA Journal of Labor Policy 2014, 3:4 Page 24 of 30 http://www.izajolp.com/content/3/1/4 the employees’ particular health shock were critical to keeping impaired workers in the labor force in the Netherlands. Such intervention significantly increased the return to work of impaired workers and reduced time on the sickness or disability program. Evidence from Sweden shows that waiting even one year following the onset of impairment significantly reduces the chance that rehabilitation will result in a return to work. Evidence from Great Britain suggests that bringing medical screening forward can help to control program growth. In contrast, none of these countries, nor Australia, has been successful to date at moving existing longer-term beneficiaries back into the labor market, although the process of re-screening and seeking to activate existing longer-term beneficiaries in Great Britain has only recently begun. Across all countries, once enrolled on disability benefits for more than a few months, only a small fraction of recipients return to work. Even when strict time limits are put in place, as in the case of Sweden, movement off the disability system for longer-duration beneficiaries is difficult. Even when it is done, most frequently it results in a shift to another public program rather than into employment. These experiences have several implications for U.S. policy discussions. First, the fact that most current DI recipients do not work is not evidence that they would have been unable to work if given alternative policy treatments (e.g., timely accommodation and rehabilitation). Indeed, the marked difference in outcomes between those given early versus later employment-oriented services in the Netherlands and Sweden shows that in a system oriented towards long-term cash benefits rather than work, many of those with residual work capacity will never return to work. The experiences in these countries also call into question the viability of ongoing attempts to gain control of the U.S. DI rolls by funding additional continuing disability reviews or enhancing post-entry rehabilitation or job training programs like Ticket-toWork. While such programs have merits, the experiences in Sweden tell us that these efforts will fall short of bringing growth in the rolls down to sustainable levels. Finally, the reforms and outcomes in these nations show the difficulties of focusing policy reforms on current beneficiaries—a practice SSA is forced to follow by rules requiring SSA-collected funds to be focused on current program recipients. This suggests that eliminating this rule and allowing SSA to focus its energies on workers with health-based work limitations who are trying to decide whether to stay on the job or apply for benefits will likely do more to curb DI growth. Lesson 4. Hurdles to reform in the U.S. are surmountable Despite this growing body of evidence that structural reforms to long-term cash disability programs can curb program growth and potentially improve outcomes for those with health-based impairments, the political coalition necessary to achieve fundamental disability policy reform has been slow to evolve in the U.S. So what are the hurdles? There are several including a number of concerns raised by supporters of the current system. (See Reno and Ekman 2012 for a summary of these arguments.) One issue raised in response to proposals for fundamental DI reform is that these benefits, while not especially generous, are essential to keeping millions of disabledworker beneficiaries out of poverty. The evidence from Europe shows that this is a very static view which assumes that in the absence of benefits, individuals with disabilities would remain out of the labor market, dependent on other forms of public or private Burkhauser et al. IZA Journal of Labor Policy 2014, 3:4 Page 25 of 30 http://www.izajolp.com/content/3/1/4 assistance for support. European disability reforms over the last decade provide plausible evidence that increased employment will occur when pro-work policies replace policies that have had the opposite effect. Their reform experience shows that a significant number of people with disabilities, who would otherwise have moved onto longterm cash benefits, were able, with reasonable levels of support, to return to work. While it is always the case that tightening the criteria for disability benefits runs the risk of denying disability benefits to those who will not be able to find work, on balance the European experience suggests that reasonable pro-work policies will both substantially reduce disability recipiency rates and increase the employment of those who would otherwise have been on the long-term disability rolls. Nonetheless it is the case that fundamental DI reform could worsen the already precarious economic position of some people with disabilities. But this should be put the context of what has been happening to the overall well-being of working age people with disabilities in the U.S. Over the past 25 years the household incomes of Americans with disabilities have stagnated relative to other working-age people. This is associated, in part, with the near continuous decline in their employment. Our reading of the European evidence is that when programs are designed to award cash transfers in lieu of work, employment falls. In contrast, when programs are designed to encourage work and award transfers only when work clearly is not possible, employment rises. Since work generally leads to increased income, especially when public policies make work pay, efforts to promote work among those with disabilities can produce positive outcomes. The most important lesson though, is that by not working, long-term disability beneficiaries will over time slip further and further behind the rest of the working-age population, whose employment allows them to benefit from increased economic growth. A final concern is that programs like DI are especially important in economic downturns where individuals with limited work capacity are not only more likely to be laid off but less likely to find a new job. Past experience of European countries, especially The Netherlands, which intentionally or unintentionally used this logic to turn their long-term disability programs into more general unemployment programs, suggests that it can be a very expensive and ultimately ineffective policy decision. Indeed, many European nations continue to struggle to regain control over their disability systems which for many decades have been used as long-term unemployment insurance programs. A key message from the European experience is that explicitly divorcing longterm “unemployability” insurance from disability insurance is critical to effectively targeting resources towards both populations. Together the experiences of other nations suggest that it is possible to balance the competing goals of providing social insurance against adverse health shocks during working-age and maximizing the work effort of all working-age adults with and without disabilities. Past disability policies in both the United States and other OECD countries have focused more on the former than the latter, resulting in rapid growth in disability transfer populations that outpaced growth in the economy. Efforts to shift to more pro-work policies over the last decade in Europe suggest that fundamental disability reforms, if done well, can lower projected long-term costs for taxpayers, make the job of disability administrators less difficult, and importantly, improve the short- and long-run opportunities of people with disabilities.