Panel Paper: The Impact of Unemployment Insurance Extensions On Disability Insurance Application and Allowance Rates

Friday, November 9, 2012 : 1:40 PM
Baltimore Theatre (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Matthew S. Rutledge, Boston College

The Great Recession of 2007-2009, like the previous four recessions, prompted the federal government to extend the duration of unemployment insurance (UI) benefits nationwide.  At the same time, Social Security Disability Insurance (SSDI) applications skyrocketed from already record-high levels.  Both programs provide disincentives to job seekers: research has shown that UI reduces job search effort, while SSDI applications fluctuate with the macroeconomy, sparking concerns that it is being used as supplemental unemployment insurance.  But the extension of UI benefits can ameliorate concerns about the efficiency of the SSDI program.  Potential disability applicants may delay applications until they exhaust their extended UI benefits.  When this occurs, costs are transferred from the depleted SSDI Trust Fund to more fungible general revenues.  In addition, some applicants who delayed disability filing might find jobs, reducing the long-term costs of the program.

This paper, the first to focus on the effect of UI extensions on disability applications, investigates the conditions under which greater availability of unemployment insurance, in general, and extended UI benefits, in particular, delay disability applications and change the composition of the pool of remaining appli­cants.  This research exploits extensions in UI duration to estimate whether UI eligibil­ity, extension, and exhaustion affect individual workers’ hazard to SSDI application, using the Survey of Income and Program Participation (SIPP) Gold Standard File, which links job loss data from the SIPP household survey to disability application and earnings information from the Social Security Administration’s (SSA) administrative records.  State-level regressions of SSDI application and allow­ance rates pro­vide additional evidence of whether UI extensions affect the size and composition of the SSDI applicant pool. 

Individual-level regression analysis estimates a multinomial logit model to account for the competing hazards of SSDI application and re-employment.  The results indicate that the probability that a jobless individual with a work limitation applies to SSDI falls by a statistically significant 58 percent during a UI extension.  Application rates then nearly double for a work-limited individual in the month that his UI benefits are exhausted compared to months after exhaustion.  The state-level analysis finds that the allowance rate significantly increases in the first few months after a UI extension, suggesting that healthier potential applicants are more likely to delay application until UI is exhausted.

Finally, the individual-level estimation results are used to simulate the effect of 13- and 26-week extensions on the costs of the UI and SSDI (including Medicare) programs.  The 18 percent increase in the short-run cost of UI benefits from extending benefits by 13 weeks is partially offset by the 6 percent decrease in long-run SSDI and Medicare costs.  These results suggest that the efficiency loss from extending UI benefits may be overstated in current debates.