The President's FY 2016 Budget last week proposed dealing with the upcoming Fiscal Speed Bump of the exhaustion of the Social Security Disability Insurance (DI) fund by shifting existing sources of money. The budget would shift payroll tax income from the Old-Age and Survivors Insurance (OASI) Fund to the Disability Insurance (DI) Fund. This proposal comes amidst the ongoing debate of whether this strategy, commonly known as a reallocation, is the right way to tackle the impending exhaustion of the DI fund next year.
This debate, recently fueled by a change in House rules, has been full of myths and misunderstandings. Supporters of a “clean reallocation” – unaccompanied by other program reforms – argue that it is a routine, technical step to move money between Social Security’s old-age program and its disability program. Opponents claim that we should not compromise the financial position of the OASI fund and oppose taking money from OASI unless we take steps to improve OASDI overall. This posts attempts to dispel some of the myths around the DI Trust Fund and reallocation debate.
Myth: We can prevent SSDI from running out of money by reducing fraud instead of reallocation
Fact: Reducing fraud will not provide enough, or timely, savings to avoid Trust Fund exhaustion.
Although it is always a good idea to reduce fraud, doing so will not provide enough savings to secure SSDI, and it will certainly not provide savings soon enough to avoid Trust Fund exhaustion. While several recent prominent cases show that SSDI fraud costs the program both money and support, estimates from the Social Security's Office of the Inspector General put the total fraud rate in the program at less than 1 percent of beneficiaries. To put this in context, if spending on SSDI benefits was reduced by 1 percent, only 6 percent of the program’s shortfall would be closed – and of course, no policy could completely eliminate fraud.
Moreover, no benefit change could occur quickly enough to avoid the need for some reallocation, inter-fund borrowing, or transfer. With little time left until the trust fund runs out, program costs would need to be reduced immediately by nearly one-fifth to prevent such exhaustion. That would mean essentially kicking off one-fifth of current beneficiaries or reducing current benefits by that same amount, neither of which is a plausible option. More thoughtful reforms could reduce program costs, but savings would accrue gradually over time, not all at once.