A cost-benefit analysis: implementing temporary disability insurance in Washington State

In practice these distinctions are not always clear-cut. By providing up to 52 weeks of benefits, California looks more like a long-term disability insurance. In this paper, the term temporary disability (TDI) indicates benefits that end prior to the one year wait period in which Social Security disability benefits typically take effect.

It is not clear whether these include insurance programs provided by employers but mandated by state TDI. Given other data, however, this appears likely.

See Jacoby 2011, for an earlier analysis demonstrating that California’s experiences provide a reasonable baseline and is in accord with data on national leave-taking.

Over the past decade California’s rate has ranged between 5% and 5.5%. We use the most recent rates because our comparisons rely upon recent Washington and California population data.

Census data collection has changed over the period since the DOL conducted its FMLA survey in 2000. Statistics now tabulate Hispanics as an ethnicity that is combined with different racial identities. Thus, unlike the DOL’s survey the Hispanic data is separated out so that its impact is compared solely to the non-Hispanic population.

This estimate approximates the number of employees reported by state officials under the Occupational Employment Survey. WA State Employment Security Department computes 2,693,214 workers. These workers, eligible for unemployment insurance, are defined similarly to California’s SDI covered workers. Of these Washington State workers, 93% had wages of $100,000 or less, this year’s approximate cutoff point for temporary disability insured wages in California.

http://www.edd.ca.gov/about_edd/pdf/qsdi_Avg_SDI_Contributions.pdf.

The equation assumes stable average weekly benefits. These could change if the percentage of insured workers making claims from various insured income brackets varied over time. This assumption is consistent with California’s experience where modest average benefit payouts reflect increases in maximum weekly benefit levels.

http://www.edd.ca.gov/About_EDD/pdf/edd-diforecast11.pdf.

Mutual of Omaha provides 24 months of benefits after a 30-day waiting period at rates that start at 1.4% for male executives in their twenties (3.6% for similarly positioned laborers) and rise as high as 14.8 for males aged 58. Women’s rates are consistently higher by at least 3%. http://www.mutualofomaha.com/disability-insurance/plan/quote.php?mc=CAS**&sitelink=3&gclid=CPn4s462kq0CFQSFhwodmzMikw#.

Other benefit differences in the two states’ plans are worth mention. In 2010 California’s mandatory program insured 55% of pre-disability earnings, up to $95,000 annual income. Washington’s optional plan replaces 60% of monthly earnings up to $120,000 annually. Because insurance premiums are calculated as a percentage of earnings, the level of insurable income differences is not material to the calculations presented here. Washington’s optional plan contains additional features, including retirement benefits for some employees, and an option for retirement benefits for higher education employees. Retirement benefits do not necessitate further adjustments because they can be included in the portion of the insurance premium allocated for long-term disability. The Higher Educational option replaces employer and employee contributions to retirement plans to individuals on disability leave. That provision largely accounts for the higher rates among higher education employees noted in our chart. Those rates (e.g., 1.86% for 2012 higher education personnel choosing a 30-day waiting period are not used in the calculations of costs savings attributed to a mandatory plan.

Elin Myer of Washington’s Public Health Authority understands the decline to better experience ratings which in turn are the result of the economic downturn and the performance pressures that have been placed upon employees. Phone conversation Dec 20, 2012.

Employees are not automatically allowed to add optional coverage once their initial eligibility period at hire is over and can not respond to lower rates.

Of course, reality will not necessarily follow the formula, as it is likely that some individuals would never choose to insure themselves, even if rates were zero.

In the absence of more reliable statistics, we are not able to say how many enrollees have plans comparable or better than either the existing Washington State voluntary plan or California’s mandatory SDI plan. Better information would allow more precise estimates for different insurance products. Yet, for reasons discussed throughout the paper, with this unavoidable exception the parameters adopted throughout the paper have been chosen so as not to establish conservative estimates of net benefits.

While the 5.5% rate is an annual rate, and current willingness to pay should represent the stock of all people, not just those who make claims in a given year, we can be reasonably certain that a substantial portion of the 5.5% claims rate did not anticipate their disability, and that the further one looks into the future, the smaller that percentage of excluded consumers will be who can anticipate their future claims.

The extent of the conservative bias in these estimates may by suggested by the degree to which to Hendren’s excluded population understate actual demand. Under the assumption that this population might be as much as 5% per year, annual net benefits could be substantially higher than 5%, as consumer surplus for this group would be realized not simply from a reduction in rates, but from insurance purchases at rates above those currently charged (for a schematic, see Figure A1 in Appendix).

http://www.sashacorp.com/turnframe.html.