Disabled workers and the indexing of Social Security benefits

We examine how benefit amounts and family income would change in response to changing the Social Security (Old-Age, Survivors, and Disability Insurance, OASDI) benefit indexing scheme. We are interested in a class of reform options designed to gradually slow the growth of benefits across the board. These options include the "price indexing" and "longevity indexing" proposals that have been part of the recent Social Security reform debate in the United States as well as a range of proposals developed in Europe. In this article, we focus on the distributional effects on the disabled. This focus leads to two comparisons. First, we compare disabled-worker beneficiaries to another group that would be affected by the changes, retired-worker beneficiaries. Second, we examine relative changes for particularly vulnerable subgroups of disabled workers. In the empirical analysis, we use two illustrative examples of potential indexing changes: Shifting from wage indexing to price indexing of the initial level of OASDI benefits; and Adjusting the initial benefit level for changes in life expectancy at retirement, that is, longevity indexing. We employ a historical counterfactual simulation to evaluate outcomes that would have resulted from changing the indexing scheme at one particular point in time. The hypothetical implementation period begins with the historical start of the current regime of indexing in 1979 and ends with one of the reference periods of the 1996 Survey of Income and Program Participation (SIPP), a 17-year period. However, we briefly assess the extent to which the results would be applicable to other time horizons. The analysis uses a cross-sectional sample of OASDI beneficiaries from the 1996 SIPP matched to Social Security administrative records. Further, we use total income from the SIPP (as adjusted to correspond to the calculated OASDI benefit amounts) to simulate eligibility for Supplemental Security Income (SSI) and SSI benefit amounts. Our overall findings pertain to three outcomes: (1) effects on OASDI benefits viewed in isolation, (2) the offsetting role of SSI, and (3) the diluting effect of other sources of family income. We find that a broader perspective incorporating all three measures is necessary to obtain an appropriate picture of distributional outcomes. Even though the proposals were designed to have proportional effects, differences between groups--such as disabled and retired workers--can arise from differences in the timing of benefit claiming, mortality, and other factors. Specifically, our cross-sectional estimates suggest that the average change in OASDI benefit levels would be higher for disabled-worker beneficiaries than for retired-worker beneficiaries. These differences are attributable to the fact that a higher proportion of the stock of disabled beneficiaries have been on the Disability Insurance (DI) program rolls for a relatively short period of time and therefore have been affected by the shift in indexing scheme for a longer period of time. These results must be interpreted within the context of the methodology that was used. Further, other methodologies may lead to different results. For example, in previous studies that restricted the sample to a particular birth cohort, a higher proportion of disabled workers than retired workers were observed to have been on the DI program rolls for a relatively long period of time. Longer time on the beneficiary rolls corresponds to less exposure to the new indexing scheme and smaller estimated benefit changes. Thus, the same underlying factor-the timing of benefit claiming-influences both results. When the offsetting role of SSI benefits is also considered, we estimate smaller overall changes, especially for those at the bottom of the income distribution. When OASDI and SSI are considered together, differences in average benefit changes between disabled and retired workers are removed. This is due to a higher rate of SSI program participation among disabled workers than among retired workers. In addition, including SSI substantially reduces the proportion of disabled workers that have large simulated changes in benefit amounts. The estimated effects of changing the indexing scheme are further muted when total family income is considered. This occurs on a roughly equivalent scale for disabled and retired workers. As a result, changing the indexing scheme would produce little change in the status quo differences in poverty status between disabled and retired workers. Finally, we examine the most economically vulnerable subgroups of OASDI beneficiaries. Within the general group of beneficiaries, we find that the most vulnerable would be less affected than average, primarily as a result of the mitigating effect of SSI benefits. Further, within the population of disabled-worker beneficiaries, we examine economically vulnerable subgroups including those in the lowest primary insurance amount quartile, with less than a high school education, with an early onset of disability, or a primary mental impairment. These groups would also be less affected than average.