Disability Insurance Program Needs a Fix Now

Unlike the Social Security retirement program, government disability funds will run out soon.

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The financial health of Social Security has moved front and center. President Obama's deficit reduction commission reportedly is actively considering recommending changes to the program when its report is issued after mid-term elections in November. Just floating a trial balloon to this effect in the news media was justification for AARP to sound the klaxon horn (again) last week about its opposition to benefit cuts.

Because the commission's task is to reduce deficits, AARP and other Social Security defenders have questioned why the program should be viewed as a contributor to soaring federal deficits in the first place. The real deficit villain related to Social Security is that overall federal deficits historically did not include the U.S. government debt that Social Security bought each year with its huge surpluses. Social Security is legally required to buy only U.S. government securities with its surpluses, so it's been doing as ordered. Successive Presidents and Congresses, however, were only too happy to look the other way and understate the true size of the federal deficit.

[Visit the U.S. News Retirement site for more planning ideas and advice.]

As was reaffirmed in this year's annual report on the program, Social Security will be able to pay all scheduled benefits until 2037 and can honor 75 percent of all claims thereafter. That's with no changes at all to the program. Changes will be required, policy experts have noted. But they need not be drastic and we shouldn't be in a rush to judgment here. I agree, except I'd plunk a big asterisk at the end of that statement.

Social Security is formally called the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, or OASDI for short. The two funds are supported by a tax on employee earnings that is matched by employers. But that tax is split up and pays for both programs -- OASI and DI.

In it's summary, the OASDI trustees' annual report this year said, "The dollar level of the Trust Funds is projected to be drawn down beginning in 2025 until assets are exhausted in 2037." That was the same depletion year as in last year's report. The deep recession has forced big numbers of economically strapped people to claim Social Security as soon as they became eligible at the age of 62. The relative stability of the program was thus favorably interpreted. So far, so good. But here was the next sentence in the summary:

"Individually, the DI fund is projected to be exhausted in 2018 and the OASI fund in 2040."

The DI part of Social Security is, in other words, already burning through assets. Last year, program expenses exceeded income (tax payments plus interest earnings on DI fund assets) for the first time since 1993. And the surge in claimants for Social Security retirement benefits (the OASI part) has been exceeded by an ever bigger rush to claim disability payments.

[See Social Security Still Keeping Its Promises.]

The economy is driving both trends but the percentage impact is greater on DI claims because the pool of possible claimants is much bigger. You need not be 62 or older to make a DI claim. With large numbers of people unemployed, and with health insurance either too expensive or simply not available, it's not surprising that DI claims have soared. Further, the numbers of persons above the age of 50 -- the primary pool of DI claimants -- has been spiking with growing numbers of Baby Boomers.

Receiving DI benefits is already an arduous process. Looking at 2005, the most recent year for which complete records are available, fewer than 40 percent of benefit claims were initially approved, according to a recent report from the Congressional Budget Office (CBO). Of the remaining 60 percent, two-thirds of the applicants dropped their claim and one-third appealed. Three-quarters of the appeals were successful but the waiting time has soared along with the volume of claims, and averaged 514 days in 2008. Additions of more claims processors have since reduced that average to 442 days but that's still a very long time for beneficiaries to wait.

The trustees' report says it expects this surge in DI claims to continue for a number of years "due to a projected sharp, but temporary, increase in incidence rates to levels comparable to some of the highest ever experienced under the DI program."

So, while overall Social Security is not approaching crisis mode, the same can't be said of its DI component. The trustees use three sets of assumptions and prepare low-cost, intermediate-cost, and high-cost forecasts. Under the low-cost scenario, the overall OASDI program is self sufficient and will never run out of funds even if no changes are made to the program. The intermediate forecast is the one widely reported, and the high-cost outlook is, well, gruesome.

For the DI program, the trustees say, "Under the low-cost assumptions, assets would begin to increase again after reaching a low point in 2015. Under the intermediate assumptions, assets would continue to decline until their projected exhaustion in 2018. Under the high-cost assumptions, DI assets would decline steadily until exhaustion in 2015."

"Without legislative action to reduce the DI program’s outlays, increase its dedicated federal revenues, or transfer other federal funds to it, the Social Security Administration (SSA) will not have the legal authority to pay full DI benefits beyond that point," the CBO says.

So, while I agree that changing Social Security to deal with the budget deficit is a bad idea, we can't afford to wait too long before addressing needed changes in the disability insurance part of the program.

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