WASHINGTON (MarketWatch) — Employment for people with disabilities is down, and the number of people receiving disability benefits is increasing steadily. That’s alarming, says author and Cornell University Professor Richard Burkhauser, who sees a loosening in eligibility standards and a decline in incentives for companies to accommodate, rehabilitate and hire those with disabilities.

The trust fund for Social Security Disability Insurance is expected to be exhausted by 2018, and costs have exceeded non-interest income since 2005, government trustees reported earlier this year.

The recession saw a growth spike among applications from workers for disability benefits, and the rolls have been steadily increasing for years. In 2010, about 8.2 million people received disabled worker benefits, up 5.3% from the prior year. Add in spouses and kids, among other recipients, and beneficiaries hit almost 11.3 million 2010, up 4.8% from the prior year. The program’s recipients have more than doubled since 1980.

What’s going on? It’s easier to qualify for benefits, and there are inadequate incentives for firms to invest in worker rehabilitation and accommodation, said Burkhauser, who is the co-author with Mary Daly of a book titled “The Declining Work and Welfare of People with Disabilities, What Went Wrong and a Strategy for Change,” from AEI Press, publisher for conservative think tank American Enterprise Institute for Public Policy Research.

MarketWatch spoke with Burkhauser about workers with disabilities and the state of government benefits.

Q: What’s behind the growth in the number of disability-insurance beneficiaries?

A: “Over the past 30 years there has been an easing in disability eligibility standards. Now the typical person coming onto the [disability insurance] rolls either has back problems or mental illnesses. This is alarming because these are the two conditions that are the most difficult to medically determine. This suggests that we are leaving more of the decision for admittance or rejection to the discretion of Social Security gatekeepers. Rather than an epidemic of mental disorders and back pain, this shift is more likely due to an explicit loosing of standards in the case of mental illness and to a relaxation by gatekeepers in their interpretation of standards in both cases. This has lead to a substantial number of people coming onto the DI rolls who would not have done so 30 years ago and more importantly they would have worked, if they hadn’t been admitted.

“The Great Recession has made matter worse in terms of DI program growth since many more people with some work-limiting impairment have lost their jobs. They have been applying to DI in record numbers and have been being accepted in record numbers. Unfortunately, when the economy recovers they are not very likely to leave the DI and return to work. And the underlying trend to more applications and acceptances that was there before the recession will continue. Hence the need for major structural reform.”

Q: In your new book you chronicle falling employment for people with disabilities. According to the Bureau of Labor Statistics, the unemployment rate for those with a disability is about 16.1%, almost twice the rate for those with no disability. What are employment prospects like for a disabled worker in 2011?

“The aftermath of the Great Recession of 2007-2009 is still being felt in the job market. Jobs are scarce for both those with and without disabilities. But people with disabilities face greater barriers to employment than others. Whatever happens to the overall employment picture will be worse for people with disabilities.”

Q: What are the barriers?

“After the onset of disability, when firms provide accommodation and rehabilitation, the good news is that workers are more likely to stay on the job. But firms don’t always provide this help to their workers. A firm’s Social Security Disability Insurance program payroll taxes are not lower when they provide such help. This lack of incentives for firms to provide such help has resulted in fewer of such workers continuing to work and more going onto the DI rolls.

“During the Great Recession, record numbers of workers applied and were accepted onto the DI rolls. Once these workers move onto Social Security Disability Insurance, they rarely leave the program and return to work even when the economy recovers.”

Q: The size of the labor force with disabilities has declined about 10% in the past three years, according to BLS. How has employment for this group changed over the past few decades?

“The employment rate of people with disabilities has dropped continuously since 1981. Now it’s at about 23%. In 1981 it was more in the range of 35%.

“Our book investigates whether this decline is primarily the result of an increasing severity of workers’ impairments or a change in the incentive they and their employers face when these workers experience the onset of a work limiting impairment. We argue that changes in Social Security policy have reduced the willingness of employers to provide accommodations and rehabilitation and their workers to seek them by making access to DI benefits much easier for workers and failing to make their employers more directly pay for their movement onto the rolls.”

Q: What is the main cause of declining employment rates among workers with disabilities?

“Because we are still feeling the aftermath of the Great Recession, in addition to the long-term decline in the employment of working age people with disabilities, the employment rate of both those with and without disability has decreased substantially since 2007. For workers with some work limitations, two factors make them more susceptible to dropping out of the labor force. First, they may require some accommodation from their employer. If that is not provided it will be more difficult for them to continue to work. But just as important, unlike those without disabilities, they have some chance of moving onto the DI program. The record number of DI applications and acceptances in the past two years attested to this possibility. Ironically, their decision to stop looking for a job and trying to go onto the DI program means they are no longer “unemployed.” The movement of workers out of the labor force and onto the DI as well as the Social Security retirement program partly explains why unemployment fell last year, even though the total number of employed workers continued to fall. Increasingly we are using DI as a long-term unemployment program. The problem is when the economy recovers, and it will recover, most people who went onto the DI rolls will stay there. Once a worker loses his or her attachment to the labor force, it’s increasingly difficult for them to move back into employment.

“The most effective way to keep workers who experience the onset of a work limitation employed is, as soon as medically possible, to provide them with accommodation and rehabilitation. The longer the delay, the less likely is a return to work. Workers who apply for DI must prove they are unable to work in a process that can take a year or two or more before a judgment is made. During that time, they will increasingly focus on their impairment and why it prevents work rather than on how to overcome it. Once they prove they can’t work and begin to get benefits, even when the economy recovers, it is unlikely they will seek work. That moment is gone, and they are much more acculturated to not being able to do any work, and staying on the disability rolls.

“Employers are in the best position to provide accommodation and rehabilitation following the onset of a work limitation. But they have costs and under our current DI payroll tax system firms can make a decision not to invest in these kinds of supports, resulting in their workers going onto the DI rolls with no direct cost implication to the employer. Unlike our Workers Compensation system, DI is not experience rated — all firms pay the same payrolls taxes, whether or not a greater proportion of their workers goes onto disability insurance. Rewarding firms who provide accommodation and slow the movement of their workers onto DI with lower DI payroll taxes and raising the payroll taxes of those who don’t would incentivize firms to provide more accommodation and rehabilitation to their workers.”

Q: The disability trust fund is expected to be exhausted by 2018. What reforms are needed to shore up the system?

“The long-term easing of DI acceptance standards and their implementation by SSA gatekeepers together with the failure to more rationally link DI payroll taxes to program use has caused a steady increase in DI program costs over the past three decades. This together with the aftermath of the Great Recession is rapidly moving the DI trust fund to bankruptcy. But what policy changes have caused, better policies can fix.

“We can focus on removing people from the current DI rolls. But when we did so in the 1980s, it resulted in a major backlash that now makes it even more difficult to remove those who no longer meet DI eligibly standards. And, quite frankly, it is not likely to lead to many of those who we remove rejoining the work force for the reasons discussed above. Or, we can focus on slowing the movement of new people onto the DI rolls. In my view we should chose the latter, by both tightening acceptance standards and more consistently enforcing them. This will make it more likely that workers will disabilities will continue to try to stay in the work force. But most importantly, we should move to an experience-rated DI system which will encourage their employers to provide them with the accommodation and rehabilitation that will be necessary for them to continue to work.”