October 25, 2014

Social Security Disability Shortfall Could Lead to Broader Reforms

  • Social Security, established in 1935, is the federal government’s largest program. It represents approximately one-fifth of the federal budget and...

The 2013 Social Security and Medicare Trustees Report released last Friday highlighted many challenges ahead for the two programs, the most urgent of which is the impending insolvency of the Disability Insurance (DI) trust fund.

In the absence of corrective legislation, the trustees said, DI benefits would need to be cut by 20 percent in 2016, when the trust fund will exhaust its supply of Treasury bonds. These bonds have enabled the program to pay full benefits since 2005, when its expenditures began to exceed its dedicated payroll tax income.

The trustees warn that “legislative action is needed as soon as possible to address the DI program’s financial imbalance.”

Such legislation could provide a vehicle for making needed, but politically difficult, changes in the broader Social Security system, which includes both DI and the larger Old Age and Survivors Insurance fund (OASI).

The trustees observed that, “In the absence of a long-term solution, lawmakers could choose to reallocate a portion of the payroll tax rate between OASI and DI, as they did in 1994.”

But diverting money from OASI to DI would be yet another temporary "fix" and would leave an even bigger hole in OASI. Lawmakers should look for a more comprehensive solution, keeping in mind that both OASI and DI are running cash deficits and drawing more heavily on general revenues to make benefit payments. In 2013, the combined general revenue OASDI subsidy is projected to be $79 billion.

The plight of the DI fund is a preview of what's ahead for OASI. The trustees have warned for many years that Social Security is on an unsustainable track. To date, the political will has been lacking to make the benefit adjustments and/or tax increases that would improve the program's outlook.

Perhaps the need to prevent a 20 percent cut in disability benefits just three years from now will provide the spark for sustainable reforms. It was, after all, the prospect of delayed or diminished checks that forced political leaders to compromise on a package of reforms in 1983.