In response to Just How Distorted is the U.S. Unemployment Rate Number?, reader Bjorn asked "care to take a guess on the percentage of fraud among the population receiving disability compensation?"

Fraud Incentive

My Reply Follows:

I suspect fraud is in the neighborhood of 25-50% (and higher would not surprise me one bit). The reason is that States Have an Incentive to Promote (Not Stop) Disability Fraud.

This all goes back to 1996 when president Bill Clinton promised to "end welfare as we know it". He did indeed do just that, and fraud is the result.

Why?

The federal government pays disability, but states pay part of welfare costs. This creates a huge incentives for states to actively promote disability fraud (simply to get people off state-sponsored welfare programs).

Fraud escalated dramatically in the wake of the housing crash as jobs became scarce.

I discussed this previously in Unwilling to Work; 25% in Hale County AL Collect Disability, 14 Million Nationwide; A Simple Solution

Here is the key snip.

Clinton Ends Welfare As We Know It

In 1996 Bill Clinton signed a welfare reform act, that he proclaimed to be the "End of Welfare As We Know It". It was. People moved off welfare on to even easier to get disability programs.

Part of Clinton's welfare reform plan pushed states to get people on welfare into jobs, partly by making states pay a much larger share of welfare costs.

The incentive "worked" using the term loosely. Welfare rolls shrank but disability rolls soared.

Welfare Costs States Money Disability Doesn't

[From the NPR report "Unfit For Work" - Please read this snip. It's key to understanding the fraud promotion claim]

A person on welfare costs a state money. That same resident on disability doesn't cost the state a cent, because the federal government covers the entire bill for people on disability. So states can save money by shifting people from welfare to disability. And the Public Consulting Group is glad to help.

PCG is a private company that states pay to comb their welfare rolls and move as many people as possible onto disability. "What we're offering is to work to identify those folks who have the highest likelihood of meeting disability criteria," Pat Coakley, who runs PCG's Social Security Advocacy Management team, told me.

The company has an office in eastern Washington state that's basically a call center, full of headsetted women in cubicles who make calls all day long to potentially disabled Americans, trying to help them discover and document their disabilities:

"The high blood pressure, how long have you been taking medications for that?" one PCG employee asked over the phone the day I visited the company. "Can you think of anything else that's been bothering you and disabling you and preventing you from working?"

The PCG agents help the potentially disabled fill out the Social Security disability application over the phone. And by help, I mean the agents actually do the filling out.

There's a reason PCG goes to all this trouble. The company gets paid by the state every time it moves someone off of welfare and onto disability. In recent contract negotiations with Missouri, PCG asked for $2,300 per person. For Missouri, that's a deal -- every time someone goes on disability, it means Missouri no longer has to send them cash payments every month. For the nation as a whole, it means one more person added to the disability rolls.

Disability Fraud

Who is making the case for the other side? Who is defending the government's decision to deny disability?

Nobody.

And that in a nutshell explains soaring disability roles and massive fraud.

When Jobs Are Plentiful

When jobs are plentiful, most people would prefer to work. But, when jobs are scarce, and welfare pays more than a minimum wage job, many would prefer not to work.

I wrote about this aspect on August 20 in Why Work for $7.25 When Welfare Pays $15.00 in 12 States and $8.00 in 33 States? Is a Low Minimum Wage the Problem?

When states come in and actively promote fraud as a means to get people off welfare, guess what happens?

Disability fraud is the answer.

Thank Bill Clinton!

Key Stats

Here are some stats from "Unfit for Work"

• Every month 14 million Americans receive a disability check.
• In 1961 the leading cause of disability was heart disease and strokes, totaling 25.7% of cases. Back pain was 8.3% of cases.
• In 2011 the leading cause of disability was a hard to disprove back pain, totaling 33.8% of cases. The second leading cause was an equally difficult to disprove "mental illness" at 19.2%. Strokes and heart disease fell to 10.6%.
• In Hale County Alabama 1 in 4 receive disability checks.
• One thing nearly every case in Hale County Alabama has in common is Dr. Perry Timberlake who defines disability in a rather creative way.
• Once people go onto disability, they almost never go back to work. Fewer than 1 percent of those who were on the federal program for disabled workers at the beginning of 2011 have returned to the workforce.

Quantifying the Fraud

Fraud varies state by state with welfare benefits and by how aggressive states are in pushing people off of welfare on to disability programs.

Given the incentive of states to push people into disability programs, and for people to never leave disability once in the program, a reasonable person would expect fraud to be rampant.

I guess 25-50% of disability claims are fraudulent, but higher would not surprise me in the least given back pain has soared from 8.3% to 33.8% and "mental illness" is at 19.2%. Combined that is whopping 53% of disability claims!

Unemployment Numbers

Inquiring minds are asking "how does this affect unemployment numbers?"

That's a good question, so let's crunch some numbers.

With 14 million collecting disability benefits ...

• 25% Fraud would add 3.5 million to the Labor Force
• 33% Fraud would add 4.7 million to the Labor Force
• 50% Fraud would add 7.0 million to the Labor Force

Let's assume 25% fraud, a rather modest assumption given the incentives for states to promote fraud coupled with the fact that a whopping 53% of disability claims are for suspicious reasons.

The examples below assume use of my practical definition of unemployment" Those who want a job, but do not have one. I also assume those fraudulently collecting disability payments would want a job if the payments stopped.

Base Numbers (from the latest jobs report - see BLS in Wonderland)

• Civilian Labor Force: 155,486
• Unemployed: 11,316,000

To the base numbers we need to add those not in the labor force but want a job.

That number is 6,285,000 (for a chart and further details, see Just How Distorted is the U.S. Unemployment Rate Number?)

Calculation Assuming 25% Fraud

Labor Force: 155,486,000 + 6,285,000 + 3,500,000 = 165,271,000
Unemployed: 11,316,000 + 6,285,000 + 3,500,000 = 21,101,000
Unemployment Rate: 21,101,000 / 165,271,000 = 12.77%

Calculation Assuming 33% Fraud

Labor Force: 155,486,000 + 6,285,000 + 4,700,000 = 166,471,000
Unemployed: 11,316,000 + 6,285,000 + 4,700,000 = 22,301,000
Unemployment Rate: 22,301,000 / 166,471,000 = 13.40%

Calculation Assuming 50% Fraud

Labor Force: 155,486,000 + 6,285,000 + 7,000,000 = 168,771,000
Unemployed: 11,316,000 + 6,285,000 + 7,000,000 = 24,601,000
Unemployment Rate: 24,601,000 / 168,771,000 = 14.58%

That is the disability fraud angle. It does not include those fraudulently receiving standard welfare (nor does it include those working part-time but want a full-time job).

The welfare fraud calculation is complicated by the fact that many on welfare work. Nonetheless, it's reasonably safe to add another 0.5% to 1.0% to account for welfare fraud (for those not yet pushed into disability fraud).

Comparison to BLS

Using my practical definition of unemployment, and factoring in disability fraud (but not welfare fraud), a realistic unemployment rate ranges from 12.77% to 14.58%.

For comparison purposes, the BLS has a base unemployment rate of 7.3% and a U-5 Rate of 8.7% (supposedly counting those who want a job but did not look).