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The Myth of ‘Out of Control’ Disability Benefits

Posted Date: August 25th, 2014 | Categories: Social Security Disability


The rising number of people receiving Social Security Disability Insurance benefits in recent decades and the projected depletion of the program’s trust fund in 2016 are whipping up a frenzy in some quarters that disability insurance is “out of control.” Don’t believe it. These developments were largely anticipated and are quite manageable if policymakers don’t lose their heads over them.

My Center on Budget and Policy Priorities colleagues have assembled a great chart book outlining the facts. First, the basics: disability insurance is an integral part of Social Security, it’s financed by part of the Social Security payroll tax, and it provides modest but vital benefits to workers who can no longer support themselves due to a serious and long-lasting medical impairment.

Most people don’t know that their Social Security payroll taxes fund not just a retirement program, but also survivors’ benefits and disability insurance. That’s valuable insurance. As the chart book highlights, young people starting their careers today have a one-third chance of dying during their working years, potentially leaving dependents in a financial bind, or of qualifying for disability insurance before reaching retirement age.

[SEE: Cartoons on the Budget and Deficit]

True, the disability insurance rolls have grown in recent decades, but most of that reflects well-understood demographic factors that have increased the number of insured workers, especially in the crucial 50 to 64 age group where risk of disability peaks. These factors include: overall population growth; the aging of baby boomers; the rise in the share of women in the labor force; and the rise in Social Security’s full retirement age from 65 to 66.

Properly measured, the share of insured workers receiving disability insurance benefits has risen much more modestly than the raw number of beneficiaries (see chart below).

140820_disability

Disability insurance benefits also  remain hard to get, even in recessions, including the recent Great Recession. While claims rose sharply, the number of approved claims rose much less. In other words, standards for approving benefits remained strict and a much higher share of applications were rejected.

Some people with a qualifying disability who can find work that accommodates their disability in a strong labor market may, however, lose their jobs and have trouble finding new ones in a weak labor market. Disability insurance allows recipients to supplement their income modestly through work, and it allows recipients to try to return to work without having their benefits immediately cut off — but few can do so.

[GALLERY: Cartoons on the Economy]

The program’s trust fund depletion in 2016 is also no surprise. Technically, old age and survivors insurance and disability insurance have separate trust funds, but experts usually refer to them collectively as the Social Security trust fund. Employees have a single deduction on their pay stub for Social Security taxes. Social Security solvency discussions typically focus on the two combined and, when they are combined, Social Security will not face a funding shortfall until 2033. Moreover, policymakers have adjusted the balance of payroll taxes between the two many times in the past without controversy. 
 

It’s time to do so again. Disability insurance costs will level off as the economy improves and baby boomers who receive benefits switch to the regular retirement program. But, at the current tax rate, disability insurance faces a long-run funding gap. There’s a simple technical fix — a temporary increase in the share of payroll taxes going to disability insurance and a corresponding cut in the share going to old age and survivors insurance that would put both on track to pay full benefits until 2033.

That reallocation is not a gimmick. Instead, it’s a necessary step to avoid an abrupt 20 percent cut in benefits for the 9 million Americans receiving disability benefits. Ideally, Congress would address disability insurance as part of a long-term solvency package for Social Security. But, we have to address its funding now with the Congress we have – not the one we might want to have

Link to original article.



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