Friday, April 12, 2013

That Which Gets Rewarded Gets Done ... Incentives Not to Work

Our economic problems are simple ones. We don't have enough people working and of those who are working, too many are working in the public sector relative to the private sector.

As a result of these now largely embedded societal 'perverse incentives' which encourage 'government' sponsored work and non-work at the expense of private sector work and ownership, we're in debt up to our eyeballs and the growing influence of government programs and policies is making our situation more difficult each day.

The trend in our lives toward an ever bigger role for government and its false promises of individual security in a real world that in fact is full of uncertainty is a most unfavorable one. It's definitely not our friend.

As just one example, Social Security Disability claims have skyrocketed in recent years. And there's a really good lesson for all of us with respect to why that's true and what it means. 

We've made it pretty easy to get the claims approved, and the pay isn't bad either. Besides, it's viewed as a waystation along the path to Social Security and Medicare status for the rest of our lives. In other words, incentives matter when it comes to working and not working as well.

Maybe there's a lesson here for those receiving food stamps and unemployment payments as well. And for public sector employees who are union members and who become eligible to take early retirement at virtually full pay.

But where the money will come from if everybody is disabled, unemployed or retired isn't a question being asked and answered often enough these days. Oh well, it will be soon because there will be no other choice other than to face the facts.

Workers Stuck in Disability Stunt Economic Recovery describes the explosion in Social Security Disability claims this way:

Former truck driver James Ottesen, of Mason, Ohio, said being on disability "kind of reminds me of welfare.'

"The unexpectedly large number of American workers who piled into the Social Security Administration's disability program during the recession and its aftermath threatens to cost the economy tens of billions a year in lost wages and diminished tax revenues.

Signs of the problem surfaced Friday, in a dismal jobs report that showed U.S. labor force participation rates falling last month to the lowest levels since 1979, the wrong direction for an economy that instead needs new legions of working men and women to drive growth and sustain a baby boomer generation headed to retirement.

Michael Feroli, chief U.S. economist for J.P. Morgan, estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences. . . .

Federal Reserve Chairman Ben Bernanke has worried that the financial crisis would lead to a permanent loss of workers, setting up what economists call hysteresis, a term borrowed from physics to describe temporary market changes that lead to permanent economic losses.
It is no longer a theoretical problem, said David Autor, a professor at the Massachusetts Institute of Technology, who has studied the disability program. The economy has a case of hysteresis, he said, created by the permanent transfer of workers to disability rolls.

Many newcomers to the disability roster are low-wage earners with limited skills, Mr. Autor said, and they are "pretty unlikely to want to forfeit economic security for a precarious job market."

Payments, tied to a worker's wage history, average $1,130 a month, which totals $13,560 a year. That is about $2,000 a year more than the federal poverty level for a single person and about $2,000 less than full-time wages at the federal minimum of $7.25 an hour. After two years, people on disability are eligible for Medicare health insurance—another government benefit that encourages recipients to stay put.

Between December 2007, when the recession started, and June 2009, when it ended, the number of Americans receiving federal disability benefits grew to 7.6 million from 7.1 million. Then the rolls swelled, reaching 8.9 million in March, about 5.4% of the civilian workforce ages 25 to 64, according to J.P. Morgan estimates. That compares with 1.7% of the U.S. workforce in 1970.
Economic growth is driven by the number of workers in an economy and by their productivity. Put simply, fewer workers usually means less growth.

Since the recession, more people have gone on disability, on net, than new workers have joined the labor force. Mr. Feroli estimated the exodus to disability costs 0.6% of national output, equal to about $95 billion a year.

"The greater cost is their long-term dependency on transfers from the federal government," Mr. Autor said, "placing strain on the soon-to-be exhausted Social Security Disability trust fund."

Last year, Social Security paid nearly $137 billion to 8.8 million disabled workers and 2.1 million of their spouses and children; related Medicare costs were about $80 billion. Program trustees estimate that by 2016, Social Security won't be able to pay all of its disability claims. . . .

The boom in disability is part of a longer-term trend that places the burden of economic casualties on the federal government. Some states use the program to reduce welfare costs, according to congressional testimony last year by David Stapleton, director of the Center for Studying Disability Policy at nonpartisan consulting firm Mathematica Policy Research.

States save money when federal disability checks replace state-paid benefits. Workers on federal disability also can switch from state-supported health insurance programs—such as Medicaid—to Medicare, he said.

The nation's burgeoning disability roster stems partly from the aging workforce: Baby boomers' bodies are breaking down, and some economists believe that the problem will level off once they reach retirement.

But boomers aren't the only ones seeking help, Of the nearly nine million former workers receiving federal disability payments, more than 2.5 million are in their 20s, 30s and 40s.

"It is difficult to overstate the role that the SSDI program plays in discouraging" employment among these young people, Messrs. Autor and Duggan said in one of their research papers, urging reform. . . .

In 2011, the latest data available, fewer than 0.5% of beneficiaries left disability rolls to work again. Most leave the program by advancing to the Society Security retirement program, or they die. . . .

The inspector general estimated that overdue medical reviews between 2005 and 2011 cost taxpayers $1.9 billion to $3.7 billion in benefits that shouldn't have been paid."

Summing Up

Incentives matter. And they matter to the states, too.

That's one reason why states are trying to shift those on the state payrolls to federal pay status.

However, money is money and taxpayers are the source of all government funds.

Similarly, workers are the source of income taxes paid.

So if we have a growing number of people not working due in part to being paid not to work, that creates an incentive not to work.

Unfortunately, it doesn't create the funds necessary to pay for the work not done, and that's a growing problem in America, regardless of whether the payer is the city, the state or the federal government.

To repeat, the source of all those funds for government payments to non-workers is the American taxpayer.

The fewer the number of working taxpayers there are, the less money there is to pay the non-working Americans whose government dependency and payments are growing.

Fewer private sector workers = less taxes = more government payments required per private sector worker = financial fiasco for nation as a whole.

That's my take.

Thanks. Bob.

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