Dispelling Common Myths in the SSDI Debate

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.

Myth: “Clean reallocation” is a routine occurrence that has happened 11 times

Fact: While the payroll tax allocation to the OASI and DI Trust Funds has changed 11 times in opposite directions, only 6 pieces of legislation have ever been passed authorizing reallocations, and they have more often than not been accompanied by other reforms.

As the table below shows, there have only been 6 pieces of legislation reallocating payroll taxes. Because some of them have made multiple changes, the total number of shifts is 11. But those who cite 1994 as the last of these 11 reallocations are mixing apples and oranges. The 1994 legislation included allocation changes in 1994, 1997, and 2000. With this in mind, claiming 11 reallocations without context creates a misleading picture.

Furthermore, reallocation has rarely been clean – four of the six bills were enacted in the context of major reforms to the program. In particular, the 1977 and 1983 reallocations were part of major Social Security reforms that extended OASDI solvency overall. The other two reallocations in 1980 and 1994 were cleaner, but one was temporary and the other intended to buy time for reforms. Congress approved the 1980 reallocation shifting revenues from DI to OASI only temporarily, since the effect was reversed the following year, explicitly saying that the bill was intended to buy time to take action restoring solvency to OASI. In addition, while the legislation providing for reallocation in 1980 was clean, it was preceded by legislation reforming the Disability Insurance program a few months earlier. The 1994 reallocation shifting revenues to DI was accompanied by a request and warnings by the Trustees that reallocation needed to be followed by structural reforms.

It is worth noting that in the past reallocation has generally diverted revenue from the program with the smaller actuarial deficit (and in four of the six cases, a surplus) to the one with a larger deficit. Furthermore, reallocation shifted taxes to more closely match the proportion of payroll taxes going to each program with their proportion of costs. In this case, neither would be true. OASI currently faces a much larger actuarial shortfall than SSDI – almost 18 percent of program costs, versus 15 percent for the SSDI program. Meanwhile, SSDI already receives a higher proportion of revenue than its proportion of spending (14% versus 13%), a fact that would be increasingly true post-reallocation.

Myth: The number of people receiving disability payments is unexpectedly growing out of control.

Fact: Much of the recent growth in SSDI rolls is driven by demographic factors, and not necessarily expected to continue.

SSDI rolls are indeed growing rapidly and have doubled since 1994. However, much of this is due to demographic and expected legislative factors, and the 2016 insolvency date should come as little surprise. Among the identified factors driving the recent growth in program enrollment include the Baby Boomers aging into the years where disability is most prevalent (45-65), more working women becoming insured by the program, and the increase in the normal retirement age to 66 years old (scheduled for 67) extending the years of eligibility for disability. The Great Recession also contributed, though its effect on the number of new beneficiaries appears to have largely subsided.

There remains an ongoing debate over how much growth has been and will be driven by other factors such as the loosening of eligibility criteria in the 1980s, lack of incentives to return to work, and economic conditions. To the extent this “structural growth” is significant, some of the recent growth in beneficiaries might continue. However, the Social Security Trustees project disability rates will  largely subside, leaving a permanent but not necessarily growing structural deficit.

Importantly, to the extent recent growth is demographic, it should serve as a warning sign for the old age program, which is beginning to be strained by the same demographic challenges that will contribute to its depletion in the next two decades. Regardless of the cause, the DI program faces a structural imbalance between revenues and outlays that needs to be addressed.

Myth: By prohibiting reallocation, the new House rule effectively guarantees across-the-board benefit cuts.

Fact: The rule does not prohibit reallocation nor does it call for benefit cuts.

The new House rule does not mandate benefit cuts. Since the DI Trust Fund is expected to run out next year, current law already called for a 20 percent benefit cut without this rule. Rather than requiring benefit cuts, the rule includes a point of order against reallocation only if this move is not accompanied by policies to improve solvency of the combined Social Security trust fund. The rule would allow reallocation legislation to prevent depletion of the trust fund (and the resulting benefit cuts) as long as it includes savings in the OASDI program, however small.

It is also worth mentioning that rules can always be waived by a majority vote in the House, the same majority necessary to authorize a reallocation. This means the the new rule does not increase the vote threshold necessary to avoid the benefit cut embedded in current law.

Myth: The new rule makes a clean reallocation almost impossible since it requires big reforms

Fact: The rule only requires small changes in either the OASI or DI programs, similar to laws recently passed or proposed.

Although the best way to deal with DI’s imbalance would be through comprehensive Social Security reform that restores long-term solvency for both funds – as the 1977 and 1983 reforms did while reallocating revenue as part of comprehensive reforms – the new rule requires much less than that. It does not even require savings equal to the amount of reallocation. It simply requires that reallocation be accompanied by changes of any size to improve solvency of the combined OASDI Fund, which is consistent with past actions on reallocation.

Importantly, any change which improves the overall solvency of either the old age or disability program – no matter how small and no matter whether on the spending or revenue side – would suffice. For example, proposals in the President’s budget to restrict “double dipping” of unemployment and disability benefits, clarify how the IRS classifies certain contract workers, improve reporting from State and Local pensions, or hold fraud facilitators liable for overpayments would all count. Last year, a rule taking benefits away from Nazis would have also satisfied the new standard.

We hope that a number of the policies to improve the SSDI program currently being developed by the McCrery-Pomeroy SSDI Solutions Initiative would also qualify.

Myth: There is no crisis because the DI fund was expected to run out around now back in 1994

Fact: Although expected, the shortfalls in the OASDI Funds are real and need to be addressed soon.

As a Social Security Trustee recently noted, when the Trustees recommended the 1994 reallocation, they explicitly said it was intended to be a short-term fix to give policymakers time to address the underlying financial imbalance in OASDI. Following the Trustees’ recommendations, Congress enacted changes in 1994 specifically designed to ensure short-term fiscal adequacy (a trust fund ratio of 100 percent for the next ten years); therefore, the trust fund depletion in 2016 was not only expected, it was deliberate. In their 1995 report, the Trustees wrote:

The condition of the Disability Insurance Trust Fund is more troublesome…While the Congress acted this past year to restore its short-term financial balance, this necessary action should be viewed as only providing time and opportunity to design and implement substantive reforms that can lead to long-term financial stability.

Furthermore, the Trustees warned at the time against further reallocations absent action to improve overall solvency, which still hasn't happened twenty years later. In this context, the new rule may be viewed as a way to enforce the intent and recommendations of the Trustees in 1994.

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Ideally, the depletion of the DI trust fund would be addressed through comprehensive Social Security reform, guaranteeing 75-year sustainable solvency for the whole program. This would allow policymakers to identify interactions between both programs and address the much larger shortfall in the OASI trust fund. But the rule requires a much smaller step – it simply requires policymakers to accompany reallocation with some change or set of changes that improves the overall financial health of the combined Social Security programs.

We hope this blog post has cleared up a few myths and, as Congress thinks about how to deal with this upcoming fiscal speedbump, they should consider comprehensive reform as well the types of improvements that the SSDI Solutions Initiative will propose.