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Expanding Private Disability Insurance Unlikely to Improve SSDI Finances

October 21, 2015 at 5:00 PM

The insurance industry has proposed allowing employers to automatically enroll their workers in private disability coverage — at the employees’ expense — while giving them the choice to opt out.  Although industry-financed studies claim this would save money for Social Security Disability Insurance (SSDI), it might have the opposite impact, a new paper by disability expert Lisa Ekman for CBPP’s Policy Futures initiative explains.  It also could disadvantage many newly covered workers unless accompanied by robust consumer protections.

Here’s why policymakers should be cautious about the proposal:

  • Expanding private disability coverage probably won’t lower SSDI costs and could raise them.  It’s unclear whether private long-term disability insurance (PLTDI) deters any workers from applying for SSDI because virtually all PLTDI policies require beneficiaries to apply for SSDI as soon as the insurer is fairly certain they’ll be found eligible.  Insurers have a strong financial incentive to get beneficiaries to apply for SSDI, since almost all PLTDI policies reduce payments if a beneficiary receives disability income from another source — a practice that often wipes out PLTDI benefits for lower-paid workers.   

    In fact, expanding private disability coverage could encourage more people to apply for SSDI by making it easier for disabled workers to get through SSDI’s five-month waiting period.

  • The services that private disability coverage provides may not be appropriate for many newly covered workers.  While Social Security covers most jobs — and 90 percent of people aged 21-64 who worked in those jobs in 2013 were insured by it in case of disability — only a minority of private-sector workers have private disability coverage, and it varies significantly by type of work, earnings, full- or part-time status, and employer size (see figure).

    Most workers covered by PLTDI have higher-paid, skilled jobs that tend to require more education.  In contrast, SSDI beneficiaries are likelier to have held lower-paid jobs and have below-average educational attainment.  Although private insurers provide services to help individuals who become disabled stay at or return to work — typically in the same company — the services that are effective for educated, skilled, full-time workers may not succeed for a larger pool of enrollees. 

  • Expanded private coverage needs robust consumer protections.  Employees deserve plain-English descriptions of the policies’ benefits and limitations, including cuts in PLTDI benefits to offset SSDI payments, before they sign up.  Also, policymakers should consider limiting plans’ exclusions of coverage for mental-health impairments and pre-existing conditions, requiring plans to continue coverage when illness makes it hard for enrollees to pay the premium, and setting other benefit standards to ensure that private disability coverage enhances the economic security of workers.

Check out the full analysis here.