DI Rears Its Ugly Head

Social Security is actually comprised of two different funds: the Old Age Insurance Trust Fund (which is what most people think of when they say “Social Security”) and the Disability Insurance Trust Fund. Bruce Krasting explains why DI is likely to rear its ugly head during the 2012 election campaign:

The forecast was that the DI Trust Fund (DITF) fund would end 2017 with a balance of only $7b. This means that the actual “go broke” date was 1/6/2018. (How to Spin a Forecast lesson 101… Gain 6 days, gain a year….)

The first Q 2012 data for the DI funds shows a 7% YoY rise in benefits. This is largely a consequence of the 3.6% COLA increase. (Ben B. maintains this does not exist). The other 3.5% reflects the rising number of folks getting benefits. Tax revenues are behind “schedule” (blame the economy). Finally, interest income is going to be under “budget”. The amount of investable funds is rapidly declining, and interest income on the DITF’s remaining cash is falling with Bernanke’s endless ZIRP.

The 2012 number for the DITF will have to be reduced from last year’s estimates by about $5b. This has a multiplier effect, as the COLA re-base repeats itself with every year. The revision for 2012 will add up to more than $20b over the next four years. This minor adjustment will bring the termination date to June of 2017. It’s still not close enough to bring the issue onto the 2012 political table.

Put it all together and DI goes into the red in 2016 which means that whichever administration is at the helm in four years, it will need to deal with the fund’s problems. Bruce goes on to explicate the politics:

If Obama is honest, he will acknowledge the problem and propose new taxes to fill the bucket. He will say that America is too rich a country to let disabled workers fall through a crack. He will get votes for that position.

Romney has a problem. He can’t propose higher taxes that would be earmarked to stabilize DI. He will say that DI has to be cut to the point that it becomes Pay-Go without new taxes. He will get votes for that position, but it will expose him to criticism. It will be argued that this is about the 1% versus disabled workers. Obama would have a field day with that position. “O” would be protecting the widows and orphans while Mitt would be keeping the rich, rich.

Technically, there is another alternative for kicking the DI can down the road a bit and from a policy standpoint it might be the right one: tightening the requirements for Social Security Disability Benefits and pruning the ranks of those receiving them. The number of those receiving benefits has skyrocketed:

The share of the U.S. population receiving Social Security Disability Insurance (DI) benefits has risen rapidly over the past two decades, from 2.2 percent of adults age 25 to 64 in 1985 to 4.1 percent in 2005. While the share of adults on DI in the U.S. today is still lower than that in most other developed countries, the recent growth of the DI program nonetheless poses significant risks to the finances of the Social Security system. Over the past two decades, the share of total Social Security spending accounted for by DI has risen from 10 percent to 17 percent. In 2005, cash payments to DI beneficiaries topped $85 Billion. DI recipients are also eligible for Medicare two years after the onset of their disability, further boosting the cost of the program.

In The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding (NBER Working Paper 12436), researchers David Autor and Mark Duggan explore both the causes and consequences of the recent growth in the DI program. They also examine the success of the DI screening process in distinguishing meritorious claims and consider potential reforms to the DI program.

Since the paper was written the increase in the number of those filing claims has accelerated. Based on the most recent snapshot the number of those on receiving benefits from the DITF has increased to more than 4.6% of the U. S. population. Indeed, one of the explanations that has been suggested for why the percentage of Americans in the work force has declined is that it may be the case that significant numbers of people in the age group just too young to receive old age benefits who have become unemployed since the 2007 recession and unable to find new jobs have joined the ranks of the disabled and are receiving benefits from the Social Security Disability Fund. Merely returning the number of those receiving benefits to the proportion of the population receiving benefits in 1985 would cut the outlays in half.

However, it’s hard to see how anybody benefits politically from pruning the ranks of those receiving disability benefits so I don’t expect that alternative will be broached.