Disability Insurance: The Alarming Underbelly of the Social Security Crisis

On Monday, July 28th, the Social Security Administration released its annual trustees report, officially titled “The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.”

Old-Age and Survivors Insurance (OASI) is commonly known as Social Security and is received by retirees or their immediate family after death. Disability insurance (DI) is also under the purview of Social Security but is received when someone is unable to work due to physical or mental disability.

In response to the release, the Committee for a Responsible Federal Budget held a panel discussion the following day, titled “Decoding the 2014 Social Security Trustees Report.”

Starting the discussion were Congressmen Tom Cole (R-OK) and John Delaney (D-MD).

At the end of May, they introduced H.R. 4786, the Social Security Commission Act of 2014. H.R. 4786 would create a 13-person Commission on Long Term Social Security Solvency. The commission would be chaired by a presidential appointee; the House and Senate each would choose six members, including two non-elected experts. For the commission to report its recommendations, it would need approval of at least nine participants, ensuring a bipartisan consensus. The Congressmen were enthusiastic about the prospect of creating this commission, but since its introduction, the bill has not moved. Everyone in the discussion agreed that progress will not continue until after the November elections.

Once the Congressmen left, the panelists began their examination of the report’s findings.

The combined Old-Age and Survivors Insurance and Federal Disability Insurance (OASDI) trust funds will be depleted in 2033. This prediction has not changed from last year’s report. Once depleted, 77 percent of total Social Security benefits will still be disbursed as revenue is continually deposited into the funds from payroll taxes.

Viewed separately, the OASI trust fund will run dry in 2034. The DI trust fund will empty in 2016 and will continue to pay just 81 percent of benefits. With disability insurance running very low very soon, the discussion steered toward solutions.

Unlike much of the federal government, the OASDI trust funds cannot borrow from outside sources to replace depleted revenue. One suggested solution is to borrow instead from the OASI fund to replenish the DI fund. This would be a short-term fix, and the almost insolvent DI fund would not be able to repay the loan to the OASI fund.

Another similar solution is to reallocate revenue from OASI to DI. Rather than a simple transfer from one fund into the other, politicians could change the portion of the social security payroll tax that benefits the two funds. Right now, the social security tax is 6.2 percent of income, with 5.3 percent funding OASI and the remaining 0.9 percent going to DI. Raising DI’s portion of the tax and lowering OASI’s portion would extend the solvency of the DI trust fund, but it would shorten the solvency timeline for the OASI trust fund.

Most of the panelists insisted that a truly long-term solution would include tax increases, benefit cuts, or both, which they did not describe in detail.

Many politicians and organizations have recognized the crisis facing Disability Insurance, but few have presented comprehensive plans to solve the problem. Last August, the Cato Institute published a policy analysis titled “The Rising Cost of Social Security Disability Insurance” to address exactly this issue.

Rather than raising taxes or putting the OASI trust fund in jeopardy, Cato recommends cutting costs drastically to save the DI trust fund. The analysis examines several ways to lower costs; the two paramount changes would be reducing benefits and enforcing stricter eligibility requirements. Regular reexamination of recipients would also result in significant savings. In the early 1980s when the Social Security Administration decided to reexamine DI beneficiaries, they found that 40 percent did not qualify to receive benefits. Cato recommends other small changes, but with these three together, Congress should be able to save Social Security Disability Insurance for those who really need help.