Henry Aaron – Chair of the Social Security Advisory Board and a Senior Fellow at the Brookings Institution – recently weighed in on the Social Security Disability Insurance (SSDI) debate. Given the imminent depletion of the program’s trust fund – leading to an across the board cut in benefits in 2016 absent congressional action – experts and policymakers are starting to wonder how to best address the program’s needs.
As we have argued before, many experts agree that SSDI is facing more challenges than insolvency. Many aspects of the program could be improved, from the incentives created by the eligibility criteria to the determination process to the efforts to encourage beneficiaries to return to work. While policymakers could simply inject funds into the program – through a payroll tax reallocation from the old-age fund, an inter-fund loan, or a general fund transfer – this would waste an opportunity to enact reforms that would make the program better for beneficiaries, workers insured by the program, and society as a whole. As Aaron explains:
Whether out of compassion or an instinct for political survival, Congress is quite unlikely to cut benefits for disabled Americans, a group that contains some of the neediest of our fellow citizens… Simply reallocating payroll taxes is not acceptable to many members of Congress in both parties. A consensus has arisen that both the design and administration of disability benefits are flawed. Critics of the program have promised to insist on reforms as a condition for agreeing to shift taxes around. Alas, agreement on just what the flaws are and what to do about them is elusive. Even worse, we lack information to undergird well-considered reforms.
The program faces challenges in a number of areas, including its core tenet, the definition of disability. To qualify for benefits, insured workers must be unable to earn above a certain threshold ($1,010 a month in 2012 for non‐blind individuals) due to a “medically determinable physical or mental impairment” (or combination of impairments) that is expected to last at least 12 months or result in death. By defining disability as the inability to work, the program discourages beneficiaries who could potentially go back to the workforce from trying, out of fear that they may lose benefits.
The National Academy of Social Insurance (NASI) released a survey last week (see video of CRFB President Maya MacGuineas at the release event) showing that a majority of Americans are willing to raise taxes – including their own – to preserve Social Security. Given the program's funding gap, it is an encouraging sign that Americans are willing to pay higher taxes to improve Social Security's solvency. Trade-off analysis, which NASI used, is an excellent way to get Americans to consider complex issues with pros and cons to all sides. Unfortunately, the design of the survey prevents the answers from being as useful as they could have been.
NASI's survey set out to determine how Americans would prefer to improve Social Security. Most respondents favored raising taxes (both the payroll tax rate and the taxable maximum) and increasing benefits. Respondents opposed raising the retirement age or means-testing benefits. This result differs from other similar surveys that found support for balanced packages of tax increases and decreased benefits for high earners.
Although it is impossible to know for sure, this survey's divergent results may have been driven by its framing of certain choices.
Social Security's finances are far from secure, and every year that Congress waits before addressing the problem makes it harder to fix. This week, the Social Security actuaries updated their estimates of options to restore solvency based on the assumptions in the 2014 Social Security Trustees report. Most of the options save a similar amount as last year but close a smaller percentage of the larger shortfall.
The most recent Trustees report showed a slightly bigger shortfall than last year, mostly because of slower short-term economic growth and the addition of one more high-deficit year at the end of the 75-year estimation window. Even though most policies would save about the same amount, the shortfall has grown by 6 percent, so each option closes a slightly smaller percentage of the shortfall.
Although the Veterans Affairs (VA) and the Patent Office are infamous among federal agencies for the long wait times and lines, their backlogs pale in comparison to another office that manages court hearings for the Social Security Disability Insurance (SSDI) program. According to an article by David A. Fahrenthold from the Washington Post, with 990,399 people waiting to get a decision on their disability claims, “That is Washington’s backlog of backlogs — a queue of waiting Americans larger than the populations of six different states.” In contrast, the VA has 526,000 cases pending and the Patent Office has 606,000 applications waiting.
The Social Security’s old age program uses a very clear, measurable standard to award benefits: the Full Retirement Age. Determining eligibility is easy, since it is purely based on your age.
Conversely, determining if a worker is eligible for SSDI benefits is not as simple. To qualify for benefits, insured workers have to suffer from one or a combination of physical impairments that render them unable to perform any job available in the economy. This requires medical evidence, a complex set of guidelines, and government employees who make determinations whether a person is disabled.
Maya MacGuineas, President of the Committee for a Responsible Budget, wrote a commentary that appeared in the Wall Street Journal Washington Wire. It is reposted here.
It’s election season, which means the time to demagogue Social Security is again upon us. Those trying to avoid difficult trade-offs in Social Security reform often say that all we have to do to is “tweak” the system by lifting the $117,000 payroll tax cap so all wages are subject to the tax.
Taxing all income above $117,000 at 12.4% would raise more than $100 billion a year–far from a tweak. And never mind that the government has many other priorities that might be a better use for new funds, such as covering growing health-care costs, making overdue investments in infrastructure and R&D, or controlling the national debt.
Even if we eliminate the cap–and there is a good case for at least raising it–that wouldn’t make Social Security even close to solvent.
According to the Social Security Administration (SSA), eliminating the cap would close about 70% of the system’s 75-year imbalance. According to Congressional Budget Office accounting, it would close only 45% of the gap.
The SSA found that eliminating the cap on payroll taxes would close only one-third of the shortfall in the 75th year. This is important because it shows whether the reform would help make the system structurally sound or whether it would generate largely short-term savings. Eliminating the cap would generate only 10 years of surpluses before the benefits Social Security pays out again begin to exceed the revenue it takes in.
Part of the reason the change would not be more effective is that while Social Security might begin taking in more revenue, it would also be on the hook for paying out larger benefits down the road. One smart way to address this would be a form of means-testing, where there would be no additional benefits associated with the additional contributions from those making more than $117,000. This would generate more revenue for Social Security while better targeting its benefits. But this change is often opposed by progressives who fear it would break the traditional link between contributions and benefits. Those critics need to decide whether providing new benefits to people who don’t need them is really worth giving away a significant portion of the gains that would be achieved by lifting the cap.
With the Disability Insurance trust fund running out of money in two years, time is running out to discuss a smart solution to the program's imbalance. Earlier this month, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) announced the formation of the SSDI Solutions Initiative to identify concrete, practical strategies for reforming the program to make it work better for beneficiaries, taxpayers, and the economy.
The SSDI Solutions Initiative took the first step toward identifying ideas to improve the SSDI program last week by issuing a call for papers, seeking ideas to improve disability insurance. Disability experts can respond to the call for papers by submitting a paper proposal by November 1. First drafts of the papers will be due April 1, 2015, and final drafts will be due on June 15, with presentations made at a conference in mid-2015. Proposals should be sent to firstname.lastname@example.org.
Authors with innovative ideas or variations on existing SSDI reform ideas are encouraged to submit their proposals. The SSDI Solutions Initiative will accept papers on a number of areas related to SSDI, but they are particularly looking at 8 different categories:
- Improving the Disability Determination Process
- Modernizing Determination Criteria and Program Eligibility
- Strengthening Program Integrity and Management
- Improving Incentives and Support for Beneficiaries to Return to Work
- Encouraging Disabled Workers to Remain in the Workforce
- Improving SSDI Program Interaction with Other Federal, State, Local, and/or Private Programs
- Moving Beyond the Current "All or Nothing" System of Awarding Benefits
- Encouraging Employers to Support Disabled Workers
As we have been reporting, many reforms to the Social Security Disability Insurance (SSDI) program could improve its effectiveness, fairness, and sustainability. One potential area for improvement is program integrity. The Office of the Inspector General (OIG) recently published a report on preventing and detecting fraud in the Social Security Disability Insurance (SSDI) system. The report summarizes existing recommendations to reduce fraud in light of recent cases in New York, Puerto Rico, and West Virginia.
Over the past decade, the number of SSDI applications, awards, and beneficiaries has increased substantially as baby boomers have reached an age range with a higher probability of disability. Benefit payments have increased, but revenue coming into the system has not. As a result, the Disability Insurance Trust Fund is projected to run out of funds in late 2016.
The increase in applications and beneficiaries poses organizational challenges for the Social Security Administration (SSA), which must review applications in a reasonable timeframe while preventing fraud. The report outlines vulnerabilities and recommendations throughout the benefit process.
In a commentary published today in Roll Call, former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) argue Congress should take a closer look at Social Security Disability Insurance (SSDI).
As they explain, the looming 2016 deadline, when the program’s trust fund is projected to become insolvent and result in an immediate across-the-board cut in benefits, will force Congressional action. Given the importance of the SSDI program, they worry about the dangers of waiting until the last minute. They are calling for a constructive debate on SSDI well in advance of the insolvency date, saying "if policymakers wait until the last minute to start cobbling together solutions, they could make things far worse."
Former Congressmen Jim McCrery (R-LA) and Earl Pomeroy (D-ND) today launched the McCrery-Pomeroy SSDI Solutions Initiative, a bipartisan effort to identify potential improvements to the Social Security Disability Insurance (SSDI) program.
The goal of the SSDI Solutions Intiative will be to solicit practical, implementable, and thoughtful ideas to improve the SSDI program through a "call for papers," a peer-review process, and an academic-style conference.
As we've explained before, the SSDI trust fund is projected to run out of funds in just two years – after which current law calls for a 20 percent across-the-board benefit cut. This could be avoided by borrowing or reallocating funds from the old-age system, but doing so would further strain the OASI trust fund, which also faces projected insolvency in the early 2030s. More importantly, the SSDI Solutions Initiative argues, it represents a missed chance to begin making improvements to various aspects of the SSDI program. They explain:
Instead of viewing the avoidance of trust fund exhaustion as a political liability, we believe policymakers should regard it as a policy opportunity. If provided with thoughtful and practical ideas to improve the SSDI program, policymakers could not only avoid insolvency but begin to reform the SSDI program for the better. This means identifying proposals well in advance of the deadline, rather than waiting for Congress to cobble together a last-minute, poorly conceived solution.
Social Security is often portrayed in one of two ways, either as its own self-contained program (the “trust fund perspective”) or as part of the broader budget (“the unified budget perspective”). Although focusing on these two lenses is sensible, the reality is more complicated; especially when it comes to the role of general revenue. Even though Social Security is mainly funded by a 12.4 percent payroll tax, general revenue comes into play even under the trust fund perspective. Indeed, since 1965, over $2.5 trillion ($3.1 trillion in today's dollars) of the $20 trillion of income received by the Social Security Trust Funds has come from sources other than the payroll tax, representing 12 percent of the total.
There are three main ways that general revenue has directly or indirectly made its way into the Social Security Trust Funds:
- Direct transfers from the General Fund: The general fund has occasionally reimbursed the Social Security Trust Funds in specific cases to compensate it for policy changes that would otherwise lower its balance. Most recently, Congress passed a payroll tax cut for 2011 and 2012, lowering the payroll tax rate by 2 percentage points to stimulate the economy but authorizing a general fund transfer so the Social Security Trust Funds would be no worse off. The holiday was responsible for $225 billion of transfers. Congress has also used general fund transfers to pay for extra benefit credits to active-duty military between 1957 and 2001, special age-72 benefits for people not covered by the program by 1968, a payroll tax credit in 1984, and other reasons. Overall, nearly $260 billion has been transferred from the General Fund since 1965, or $300 billion in today's dollars.
- Taxation of Benefits: Since 1983, retirees with significant income from sources other than Social Security have paid income tax on a portion of their Social Security benefits (prior to that, benefits were tax-free for everyone). Although this money is paid via the income tax, it is credited back to the Social Security Trust Funds. Since 1983, $370 billion has been transferred from the General Fund due to the taxation of benefits, or $440 billion in today's dollars.
- Interest paid on Social Security bonds: The Social Security Trust Funds currently contain $2.8 trillion of assets, mainly as a result of significant surpluses in the 1990s and 2000s. That money is invested in U.S. Treasury bonds, which earn interest paid from general revenue. The trust funds earned about $100 billion of interest last year and have earned about $1.9 trillion since 1965, or $2.3 trillion in today's dollars.