Funding shortfall for Social Security disability program: Is it real?

In the wake of Republican victories in the election last fall, pundits warned that Congress would be at loggerheads with President Obama on a number of budget issues in 2015, including over highway funding and the Department of Homeland Security.

Not high on the list of hot topics: Social Security.

Yet the vaunted social insurance system is suddenly a hot part of the fiscal debate in Washington – and it's not waiting for 2016 elections. The new Obama budget proposes a patch to the program’s support for people with disabilities, but Republicans say the system needs an overhaul, not a Band-Aid.

How urgent an issue is this? Specifically, how real is the financial trouble for the disability program?

The two sides are far apart on their characterizations, but they agree that something needs to be done, and a good case can be made that the reality is between the extremes. 

Many Democrats and liberals say, in effect, that Social Security’s Disability Insurance program is in trouble only if Republicans refuse to rubber stamp Mr. Obama’s fix.

Sen. Bernie Sanders (I) of Vermont, the top member of the Democratic caucus on the Senate Budget Committee, accused Republicans of trying “to manufacture a crisis where none exists.”

On the Republican side, Sen. Mike Enzi of Wyoming, who chairs that panel, says that “by December of next year, the program will be broke.”

What's new is that after years of talk about Social Security's solvency and the need to reform it (or not), Congress has come to its first definitive fork in the road on the issue. Perhaps the problem isn’t as dire as Republicans say it is, but Obama also might not have a slam-dunk case for his patch.

A good many economists agree with the Republican view that reforms are needed to keep the system solvent – and the sooner they’re enacted, the better it will be for the nation’s fiscal health.

Here are key facts behind the rhetoric:

• The programs. The Social Security system has two trust funds, one for Old-Age and Survivors Insurance (essentially retirees) and one for Disability Insurance. The two funds (OASDI) have their own official balances and allocation of revenues from Social Security payroll taxes – and hence they have differing levels of solvency.

• The problem. The old-age trust fund is on track to be able to keep paying promised benefits in full through 2034, but the DI program can only do this through 2016, according to estimates from Social Security’s trustees.

• Going 'broke'? The 2016 date is where Senator Enzi and others draw references to DI “bankruptcy” or going “broke” by next year. It’s also what prompts the Obama administration to call for a fix. But the DI program would still have enough tax revenue that could keep funding about 81 percent of promised benefits. That’s not good for beneficiaries, but it’s not the same as going broke. 

• Obama's proposal. Obama’s proposed fix is designed to balance things out so the two trust funds last for the same amount of time before running dry. It would put a higher share of payroll taxes toward the DI program, and a smaller share toward the old-age program. By Social Security’s estimates, that would mean neither trust fund would be depleted until 2033. 

• Looking ahead. That 2033 date is the one many Democrats emphasize when they call the other side alarmists. Yet at best, that merely postpones one day of reckoning (the 2016 DI deadline) while bringing another one (for the old-age program) a year closer. And when you’re talking about all US retirees facing the prospect of getting only 75 percent of promised benefits, 2033 isn’t so far away.

These facts suggest that Republican Sen. Orrin Hatch of Utah had a valid point when he argued this week on the Senate floor that “having a joint trust fund exhaustion as a target doesn’t solve any fundamental financial problem facing ... Social Security.”

At the same time, Democrats have a point when they note that rebalancing the tax revenues between the two trust funds has been done by Congress many times in the past.

The nonpartisan Committee for a Responsible Federal Budget notes that Congress has reallocated tax receipts between these two funds in the past, but generally accompanied by reforms to Social Security.

House Republicans are seeking to block any such reallocation, unless it’s accompanied by reforms to shore up Social Security so promised benefits can be paid beyond 2033.

The Social Security trustees said in their 2014 annual report that although Congress may consider another rebalancing, such a move "might serve to delay DI reforms and much needed financial corrections for OASDI as a whole." 

Regardless of whether the tax flows are rebalanced, the two programs may call for differing reforms to bolster their solvency.

In the old-age program, possible fixes include asking high-earning Americans to shoulder bigger tax burdens, modestly raising the retirement age, and adjusting the inflation index used for benefits (so that annual cost-of-living increases aren’t so big).

On the disability side, changes might include expanding incentives for people to work rather than rely on DI benefits. “Increasing employment among individuals with disabilities could improve their economic well-being and increase their autonomy while also reducing the fiscal strains on Social Security,” Stanford University economist Mark Duggan argued at a Senate hearing this week.

The disability program has grown markedly in recent years. By 2012 it was accounting for 18 percent of all Social Security benefits, up from 10 percent in 1970, according to the nonpartisan Congressional Budget Office.

Much of the expansion stemmed from demographics, as an aging population included more people developing disabilities in their later work years, a 2013 CBO analysis concluded. But it also found the growth in the program to be related to 1984 legislation that loosened the definition of conditions qualifying as disabilities, and in fluctuations in the economy – such as the long jobs drought following the 2008 financial crisis.

“The DI rolls have barely grown for the last two years,” notes Kathy Ruffing of the liberal Center on Budget and Policy Priorities.

That slowdown coincides with an easing of demographic pressures on the program, as the baby boomers retire, as well as the improving economy.