Future Work Still Needed after Budget’s Disability Fix

The bipartisan budget bill just passed by Congress contains several provisions affecting Social Security disability insurance (DI) operations as well as Social Security finances generally.  The purpose of this piece is to explain key effects of the disability provisions.  I will not speak to the merits of the budget deal as a whole, which is already the subject of many others’ analysis and commentary.

The details of the disability provisions are complex and likely of interest only to those steeped in Social Security disability policy.  So before proceeding to describe them, I will stress three bottom-line conclusions:

1) The provisions represent a slight improvement to disability program operations.

2) The provisions represent a substantial improvement over the likely result if legislative action had been further postponed until nearer to projected DI trust fund depletion in late 2016.

3) Passage puts the program in better condition but it will rapidly grow worse unless legislators enact further Social Security reforms in short order (e.g., after next year).  This worsening has nothing to do with the budget bill provisions.  It is because time is the enemy of Social Security finances. Until comprehensive corrections are enacted the shortfalls facing Social Security, including disability, will continue to grow worse.    

Some background may clarify these points.

Social Security DI has been running a deficit of tax income relative to benefit spending, forcing the program to draw down the spending authority of its trust fund at a rate that would result in depletion in late 2016.  This threatened beneficiaries with sudden benefit reductions of approximately 19%. See Figure 1, reproduced from this year’s trustees’ report.

Second, while the disability component of Social Security faces insolvency soonest, the program’s retirement trust fund is in even worse long-term condition.  As I noted in a previous piece, the retirement side “actually faces the larger actuarial imbalance.  DI is hitting the wall first largely because the baby boomers hit their peak disability years before their retirement years.” Figure 2 (also from the TR) shows shortfalls in Social Security’s combined trust funds emerging later but also being larger than those in disability alone.  Thus, shifting funds from Social Security’s retirement side to its disability side wouldn’t by itself fix the underlying problem, it would merely facilitate further delay in dealing with it.

A third critical point is that continued delays would render these problems much more difficult to solve.  As I noted in another previous piece, “If legislation enacted today held current (Social Security) beneficiaries harmless, long-range financial balance could be restored by reducing scheduled benefits for future beneficiaries by 19.6%. If, however, such a strategy were attempted after employing delaying tactics until 2034, by then even 100% elimination of benefits for new claimants would be insufficient to avoid depletion of the combined trust funds.” 

These factors framed a spectrum of choices facing legislators confronting the projected depletion of DI’s trust fund next year:

• The most responsible and ideal result -- but also the most ambitious and politically difficult -- would have been comprehensive legislation shoring up the entirety of Social Security’s finances, as last occurred in 1983.  
• The worst choice would have been inaction, allowing 11 million Social Security disability beneficiaries to experience interruptions of their benefits, effectively reducing their Social Security income by 19%.  
• The second worst choice would have been to do nothing other than paper over the problem for several years into the future by shifting funds between Social Security’s accounts.  This would irresponsibly allow the shortfalls in disability, and in Social Security as a whole, to grow to the point where they could no longer plausibly be corrected.  

Negotiators opted for incrementalism; introducing some slight improvements to program finances while transferring just enough funds between Social Security accounts to ward off a disability financing crisis in the near term, but without sanctioning an extended period of destructive, and potentially fatal, further delays.  

Let’s now return to and explain the bottom-line conclusions.

1) The provisions represent a slight improvement to disability program operations.  

As seen in the Social Security Chief Actuary’s memorandum on the bill, its dent in Social Security’s long-term shortfall is very small (between 1-1.5%) but there will be some expected improvements in program integrity.  The biggest savings come from two provisions, one closing loopholes that had allowed Social Security benefits to be claimed and suspended in ways causing higher-than-intended benefit payments to secondary household beneficiaries.  The other reform would require that the medical portion of disability reviews be completed by an appropriate physician, psychiatrist or psychologist.  Other provisions, not scored as achieving significant savings, would expand the use of electronic payroll data and cooperative disability investigations units to “reduce fraud and overpayments.”  Still others would allow for demonstration projects aimed at clearing the way for disabled individuals to return to work.   It is reasonably possible that these reforms taken together could produce more savings than now projected for them, but Social Security’s financial shortfalls are far too large to be corrected with such program integrity measures alone.

Importantly, unlike a standalone reallocation of revenues between Social Security’s trust funds, this bill would improve both disability and combined Social Security finances without significant weakening of the program’s retirement trust fund.  The bill does this by generating savings within the retirement trust fund that are roughly comparable to the revenues being shifted to disability (specifically, 0.57% of workers’ taxable wages from 2016-18, enough to extend projected DI solvency until 2022).

2) The provisions represent a substantial improvement over the likely result if legislative action had been further delayed.

Although the provisions represent only a slight immediate financial improvement, it’s important to bear in mind that without action things were about to get worse in a hurry.  Disability trust fund depletion and 19% benefit cuts were projected for late 2016 – an intolerable result legislators would almost certainly not have permitted.  In a last-minute election-year crisis situation, it would likely be prohibitively difficult to legislate reasonable reforms, increasing the risk of simply papering over the problem by shifting funds between Social Security accounts (allowing overall program finances to grow still worse).

The bill’s combination of modest reforms and a modest tax reallocation is only a slight improvement over previous law.  But it is worlds better than bailing out disability with retirement trust fund revenues with no reforms at all, which is quite possibly where we’d otherwise be headed.

3) After an initial improvement, things are going to get rapidly worse again unless there is prompt follow-up action (presumably after 2016.)

With this bill’s passage, it’s unlikely Congress will act again on Social Security disability before the 2016 elections.  But lawmakers can’t afford to wait much longer after that, and certainly not to dither until DI’s new projected insolvency date of 2022.  Consider for example that the budget deal improves Social Security finances by something less than 0.04% of taxable worker wages, whereas the program’s long-range shortfall grows by 0.06% of wages every year.  Even this understates the actual worsening because, by the time the program’s combined trust funds are projected to be insolvent, annual deficits requiring closure look to be well over 3% of taxable worker wages.  Given that reasonable proposals to restore long-term solvency tend to reduce annual deficits to not much more than 1% of wages by the 2030s, we basically have less than 20 years to effectuate annual improvements equaling over 2% of wages.  In other words, the practical task currently grows more difficult by at least 0.11% of wages every year, an annual worsening roughly triple the improvement in the budget bill.  Remember also that the current shortfall is already substantially larger than the one closed with so much difficulty in 1983.  Clearly we don’t have further time to waste.

Brokering a comprehensive solution to Social Security’s financing shortfalls will be difficult. At the same time there is clearly still some low-hanging fruit available.  For example, President Obama’s proposal to prevent double-dipping in DI and unemployment insurance benefits, also supported by Congressman Sam Johnson and Senator Orrin Hatch, remains out there to be enacted.  (Disability benefits are intended only for those who cannot engage in meaningful employment, whereas unemployment benefits are supposed to be available only to those currently searching for work; the two programs are drawn up such that individuals should only be able to receive from one or the other.)  Again, however, savings from such program integrity provisions would be modest.

In sum, the budget deal slightly improves the outlook for Social Security disability.  Things will shortly resume worsening, however, requiring legislators to rejoin this vital work after 2016.

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, and a contributor to e21. He recently served as a public trustee for Social Security and Medicare.

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