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.
In addition to updating budget projections, CBO's baseline also looks at the state of various government trust funds over the next ten years. Two of the trust funds – the Highway Trust Fund (HTF) and Social Security Disability Insurance (DI) will have to be dealt with this year or next. The other two with later exhaustion dates – Social Security Old Age and Survivors' Insurance (OASI) and Medicare Hospital Insurance (HI) – have both seen a drop in the size of reserves. Here's a rundown of each of these four trust funds.
Highway Trust Fund
The last time lawmakers dealt with highway financing, they intended that the expiration of the highway bill and the exhaustion of the HTF both happen at the end of May. Now, it looks like there may be a little time between the two as the general revenue transfer to the HTF may last longer.
Previously, CBO expected there to be a $2 billion shortfall in FY 2015, but that gap has been wiped out in the newest projections by two developments: slightly higher gas tax revenue (from lower gas prices increasing demand) and slightly lower spending from lawmakers freezing spending in 2015 rather than letting it grow with inflation. These developments mean that lawmakers may be able to wait until the summer to deal with the HTF, thus theoretically allowing them to write a new highway bill without dealing with the financing gap for a little bit. These two developments also make a long-term solution slightly easier, reducing the trust fund shortfall by about $10 billion.
Disability Insurance Trust Fund
Although the 114th Congress is just getting settled, it will have to move quickly to address a series of deadlines with serious policy and fiscal consequences. These "Fiscal Speed Bumps" present serious challenges and risks but also opportunities for policymakers, as we explain in a new paper.
The paper lays out the seven speed bumps -- six this year and one in 2016 -- that policymakers will have to (or should) address this year, what policymakers have usually done in the past, and the consequences of inaction for each. These speed bumps are:
- Expiration of the CR funding Homeland Security (February 27, 2015)
- Reinstatement of the debt ceiling (March 16, 2015/Fall 2015)
- Expiration of the “doc fix” and return of the SGR (March 31, 2015)
- Expiration of the highway bill, insolvency of the Highway Trust Fund (May 31, 2015)
- Expiration of 2015 appropriations, return of sequestration (October 1, 2015)
- Deadline to renew tax extenders retroactively (December 31, 2015)
- Insolvency of the Social Security Disability Insurance Trust Fund (late 2016)
It is clear that Social Security faces financial challenges. This year, its own Trustees estimated the combined trust funds would run out of reserves in 2033 while CBO estimated a 2030 exhaustion date. But yesterday, CBO released a more detailed set of numbers, which show their projections of year-by-year revenue and spending, along with a range of other possible outcomes. The results aren’t pretty.
CBO estimates that the Disability Insurance trust fund will run out during FY 2017 and the Old Age and Survivors' Insurance trust fund would run out in 2032. If lawmakers patched up SSDI by reallocating revenue from OASI, the combined trust fund will run out in 2030, at which point benefits would be cut by 26 percent.
The exhaustion of the trust fund is caused by a large run-up in spending over the next few decades while revenue rises only slightly. As a percent of payroll, outlays have already risen significantly from 10.4 percent in 2000 to 13.8 percent in 2014, both a factor of higher spending and relatively slow payroll growth. Going forward, outlays will continue to rise, exceeding 18 percent in 20 years and 20 percent in 75 years, almost twice as much as was spent in 2000. Meanwhile, revenue will creep up only slightly from 12.8 percent of payroll in 2014 to 13.6 percent in 75 years.
As a percent of GDP, outlays would rise from 4.9 percent in 2014 to 5.7 percent in 2024 and 6.4 percent by the mid-2030s. After dipping slightly, spending would rise again, reaching an all-time high of 6.9 percent 75 years from now. Revenue would stay fairly flat at 4.6 percent.
In his final week on Capitol Hill, retiring Senator Tom Coburn (R-OK) introduced a bill with a wide-ranging set of measures to, in his words, protect and strengthen the Social Security Disability Insurance (SSDI) program. Coburn put on the table concrete reform proposals for consideration in the next Congress, advocating for reforms beyond simply restoring solvency to the dwindling DI trust fund:
When the trust fund is exhausted in 2016, many Members of Congress will say we just need to move funds from the Social Security retirement program. Let me be clear: this is not a solution; it is a Band-Aid, a temporary fix that takes money away from seniors and will eventually hurt taxpayers when both funds go broke in 2033.
Coburn proposed a broad mix of proposals, from long-discussed ideas to reform the disability determination process and upgrade SSA’s data sharing and processing systems, to new demonstration projects that help potential beneficiaries remain attached or return to the workforce. This effort is in line with attempts by other policymakers to elevate SSDI to the top of the agenda, notably the SSDI Solutions Initiative, recently launched by former Congressmen Jim McCrery and Earl Pomeroy with support from CRFB, to identify reforms to make the program work better for beneficiaries and those contributing to the system.
Some of the most important reforms proposed in the bill include:
The House passed the ABLE Act yesterday, a bill that helps those who have been disabled since youth accumulate savings. The bill, with an estimated cost of $2 billion over the next 10 years, would create tax-free savings accounts that do not count against the account holder for means-tested programs. The bill is an encouraging example of fiscal responsibility, since it is fully paid for with savings in other parts of the budget.
Currently, low-income individuals cannot accumulate more than a certain amount in their savings accounts without losing SSI and Medicaid payments. For instance, individuals with more than $2,000 or couples with more than $3,000 in savings and assets are ineligible to receive SSI payments. Many have pointed out that these limits prevent people with disabilities save for medical bills, education, or equipment they may need to stay in the workforce.
To remedy this, the bill would allow any child or person who became disabled before the age of 26 to establish an ABLE account and contribute up to $14,000 annually (subject to other state caps). The balance of the account would not count against the asset limits for low-income programs. Contributions into the account are made with after-tax dollars but there is no tax on the account's accrued interest or dividends.
In October, the National Academy for Social Insurance published a study on Americans' preferred solution to making Social Security solvent. CRFB responded with a post questioning the study's option choices and description of some of the options. NASI's Board Chair Bill Arnone defended their methodology in a subsequent post. The following response was posted by CRFB President Maya MacGuineas.
The National Academy of Social Insurance has done a real service by conducting “trade-off analyses” to better understand how Americans would fix a Social Security program quickly headed toward insolvency. By forcing Americans to fully understand and weigh various options, rather than just asking about them in isolation, a trade-off analysis has the power to better simulate the tough choices that lawmakers will face in adjusting the program.
As we wrote in our blog, however, NASI’s trade-off analysis falls short in some areas that cause us to question the results. As we explained, the survey omits the single largest and most prominent set of benefit options – gradual adjustments to the initial benefit – which have been in nearly all plans that restore solvency by slowing benefit growth or with a balance of revenue and spending options. On top of that, many of the choices are framed in fashions that are not parallel with each other, likely leading participants to favor certain choices over others.
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.