WASHINGTON (Reuters) - Monica Soltes was excited 10 years ago to leave Merrill Lynch and start her own business as an independent financial planner in San Diego. After she fell off a porch at her cousin's cottage and broke her elbow, her dreams unraveled.
Following multiple surgeries that confined her to bed, Soltes was diagnosed with a hormonal disease that is weakening her bones. She also ran out of money, signed up for disability benefits and has been unable to work again.
The 47-year-old from Michigan is among the 8.7 million American workers on the U.S. disability rolls, an important part of the social safety net. Since the recession began in 2007, she has been joined by a record number of people seeking disability benefits, raising questions about the program's solvency and casting a pall over future prospects for U.S. economic growth.
Applicants soared to a record high of 2.94 million in 2010, and have held above 18 per 1,000 workers in the past three years - a far higher rate than in previous recessions.
"There are serious concerns that this increase in disability benefits is a type of 'hidden unemployment,'" said Richard Burkhauser, a professor of economics at Cornell University.
Even though only 35 percent of applicants are awarded disability, those receiving disability benefits now account for 5.6 percent of the working age population, up from about 4.5 percent in 2007. At this rate of growth, Burkhauser estimates that total would reach over 7 percent by 2018.
The problem is those on disability rarely return to work, reducing the overall size of the labor force and weakening the U.S. economy's growth prospects. Rising gross domestic product (GDP) depends upon a growing workforce and rising productivity.
Since the recession began, the share of Americans actively looking for work, known as the labor participation rate, has fallen to 63.6 percent from 66 percent in 2007.
Some people give up looking for work temporarily, but the size of the decline has perplexed economists and disability is clearly a factor.
JP Morgan estimates it accounts for half a percentage point of the drop. With jobs scarce, it causes little drag on growth.
But Chris Low, chief economist at FTN Financial, said over time, disability will rob roughly $250 billion - or 1.6 percent - from total output each year once the economy returns to full employment, probably within the next five to seven years. This will also widen the budget deficit.
"There is no loss of GDP right away, as long as there is an ample surplus of employment. Think about it, would it really make a difference to us if there were two or three fewer people applying for our job opening?" he said.
"But when the economy finally starts getting close to full employment, the Federal Reserve will have to tap the brakes sooner. GDP will have to slow to 2 percent to 2.5 percent a year or two sooner than would otherwise be the case," Low added.
LOST SKILLS, LOST LABOR
The longer someone is out of the workforce, the more their skills grow outdated and the harder it is to return to work.
They may also lose healthcare coverage. Not all employees are offered health insurance, while disability recipients are covered by the federal Medicare healthcare program. The result is that only 3 percent of people who claim disability ever get another job within 10 years.
Soltes is keenly aware of the difficulties. Since her diagnosis, she has moved in with her uncle in Michigan. After receiving her first disability benefits in 2006, she tried to sell Medicare healthcare plans. The business did not succeed and she now wants to work as a business adviser for the disabled.
"Whatever I do, it will be self-employment. It would be impossible for me to become someone's employee. I must go at my own pace - not someone else's - and do what my heart says must be done," Soltes said.
The declining share of working age people in the workforce and the high level of unemployment has caught the attention of Federal Reserve Chairman Ben Bernanke.
"Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning," the U.S. central bank chief said in a speech on labor in March.
Not only is there a personal cost ranging from lost skills to stress-related illnesses and worsening health, it strains public finances, he said. Payroll tax revenue is lost and benefit payouts rise to support the unemployed and their families.
Bernanke has made it clear that he is ready to provide further monetary support to help the economy if the U.S. labor market fails to improve. The April payrolls report was far from encouraging, showing only 115,000 new jobs created - about half the pace needed for healthy growth - and the labor participation rate hitting a 30-year low 63.6 percent of the population.
REFORM NEEDED
Economists say part of the rise in disability claims may be due to people nearing retirement who ignored a health problem when the job market was strong, but then seek benefits when they lose their job as a bridge until they qualify for Social Security pension plans.
Yet it is not the only reason. An aging population accounted for two-thirds of the rise in claims from 2000-07 as so-called baby boomers entered their 50s and 60s, when disabilities are more common, but they have only accounted for 10 percent of growth from 2007-10.
"If you look at the people on disability, around 40 percent are in their 60s. But younger people in their 30s and in their 40s have grown a lot. That is part of what has been driving the program," said Mark Duggan, an economist at the Wharton School of the University of Pennsylvania.
Duggan and other economists say the major change in the growth rate stems from a series of reforms in the mid-1980s, which changed the focus of screening from medical criteria to working ability. Almost half of disability claims are for problems such as back pain and anxiety, which are more difficult to verify. This has led to thousands of new appeals filed every month before the U.S. administrative courts.
Soltes also said there are very few incentives for getting off the disability rolls, which pay an average cash benefit of $1,100 per month. While that is less than in most advanced economies, those in the United States are also provided Medicare health insurance.
"They are not encouraged to go back to work. I have gone to multiple meetings on a program called 'Ticket to Work' and there were only five people who showed up," she said.
If people do return to work, they could lose benefits such as health insurance, which further discourages some from looking, said Richard Johnson, Director of the Program on Retirement Policy at The Urban Institute in Washington.
Economists said these issues would need to be addressed to reverse the advance.
"If you provide incentives to people to go back to work, they do that," Barry Lundquist, President of The Council for Disability Awareness, a non-profit organization which advises disabled workers.
There is a pressing reason for change. At the current rate, disability rolls will run out of funds in 2016, adding to strains on the country's debt load, already at $15 trillion. In December 2011 alone, the program paid out $4.3 billion more than it collected in tax revenue and it paid a total of $128.9 billion last year.
The disability program is funded mainly by payroll taxes, with additional revenue from interest on the assets in the trust fund, and income from the tax levied on those who receive Social Security retirement benefits.
"To keep the combined system afloat, we're going to have to raise taxes, cut benefits, or probably do both," said The Urban Institute's Johnson.
(Additional reporting by Jason Lange; Editing by Stella Dawson, G Crosse)