Disability Insurance: Clarifying the Choices

Social Security Disability Insurance (DI) is much in the news these days. It can be hard to separate fact from fiction. Here are some key points to keep in mind.

DI Basics
DI provides essential wage-replacement income to workers who have lost their capacity to earn a living due to the onset of a severe, long-term disability. The DI definition of disability is very strict: a medical condition that prevents an individual from performing basic work activities for at least 12 months or that ends in death.

Although benefits are modest ($1,145 a month on average), more than half of disabled worker beneficiaries rely on these benefits for 75% or more of their total income.

The risk of needing DI rises sharply with age. Seven in 10 disabled worker beneficiaries are over age 50, including 3 in 10 who are over 60; at 66, they shift to retirement benefits. Many who receive DI have life-threatening conditions. About 1 in 5 men and 1 in 6 women die within 5 years of starting to receive benefits.  

Workers earn DI protection by paying into Social Security. For Social Security as a whole, they pay 6.2% of their earnings and their employers pay a matching amount, on earnings up to $118,500 a year. Of the 6.2%, 5.3% is for old-age and survivors insurance (OASI) and 0.9% is for DI. The combined  OASDI system is adequately financed until 2033. By law, however, there are two separate trust funds. The OASI trust fund is adequately financed until 2034, but the DI trust fund faces a shortfall beginning in 2016 and will require legislation in order to continue paying full benefits. Without legislation, disability benefits would have to be reduced by nearly 20%.

DI Funding
The DI shortfall is not a surprise. Experts have long known that the costs of Social Security retirement benefits would rise as members of the Boomer Generation (born in 1946-1965) reach their full retirement age; boomers began reaching that age in 2012. Before reaching retirement age, boomers entered their high-risk disability years (ages 50-66), starting in 1996. The recent rise in DI costs has long been anticipated by Social Security actuaries. In 1995, the actuaries projected that the DI trust fund would run short of funds in 2016.

Moreover, increasing the full retirement age from 65 to 66 means that disabled workers receive DI a year longer and start retirement benefits a year later – a change that shifts costs from the OASI to the DI fund.

Options for Lawmakers
Lawmakers have a range of options, including to: rebalance the OASI and DI funds; strengthen DI; and strengthen Social Security as a whole.

1) Rebalance OASI and DI funds. Lawmakers have shifted contribution rates between the OASI and DI funds many times in the past. As the National Academy of Social Insurance’s brief and a recent Center on Budget and Policy Priorities blog point out, Congress has shifted contribution rates 11 times, sometimes shifting to the OASI fund, other times to the DI fund. Rebalancing has not been controversial.  A shift from OASI to DI would enable both funds to pay full benefits until 2033.

A recent change to House rules — adopted on the first day of the 114th Congress — prohibits the House from considering proposals to reallocate the tax rate between the two funds, unless the legislation also improves the solvency of the combined Social Security funds. Limiting Social Security policy choices  by changing House rules is without precedent.

A variation of this option is to combine the OASI and the DI trust funds into a single, unified OASDI trust fund. The combined fund would cover full benefits until 2033.

2) Strengthen DI finances.   Another option would modestly increase the DI contribution rate. The DI rate was once scheduled in law to reach 1.1% for workers and employers each, starting in 1990. But before that took effect, part of the DI rate was shifted to the OASI fund, leaving the current DI rate at 0.9%. Restoring the DI rate to 1.1% for workers and employers each would keep DI solvent for 75 years, according to Social Security’s actuaries. That would increase the combined OASDI rate from 6.2% to 6.4% for workers and employers each. For a worker earning $50,000 a year, the increase would be $100 a year, or $1.92 a week, matched by the employer.

Another way to strengthen DI finances would follow a precedent used to finance Medicare’s hospital insurance (HI) fund. Like Social Security, HI is financed by workers’ contributions from earnings, matched by employers; also like Social Security, the contribution rate was historically applied to earned income only up to a taxable earnings cap. In 1993, lawmakers eliminated the cap on earnings subject to HI taxes, starting in 1994. That meant that the top 5% of workers in 1994 started paying the 1.45% HI tax throughout the year (as other workers were already doing) and their employers did so too. Applying this concept to the current 0.9% DI contribution rate starting in 2016 could provide a margin of safety for the financing of the DI program.

3) Strengthen Social Security as a whole: Congress could consider a range of policy options that would strengthen Social Security as a whole. The Academy’s recent survey (Americans Make Hard Choices on Social Security: A Survey With Trade-Off Analysis) found that after considering a balanced array of 12 policy changes for Social Security, 7 in 10 respondents chose a package of changes that increases revenues in two ways and increases benefits in two targeted ways for vulnerable groups. This package would balance Social Security’s finances for 75 years and beyond without reducing benefits.

More broadly, the study found that most respondents don’t mind paying for Social Security and are willing to pay somewhat more, if needed. Eight in 10 respondents (including 69% of Republicans and 84% of Democrats) agree that “it is critical to preserve Social Security benefits for future generations, even if it means increasing Social Security taxes paid by working Americans.” On DI in particular, 55% of respondents are concerned that average benefits are too low.

Points to Remember
DI is critical protection that workers earn by paying into Social Security. The program is not broken; the fact that its outgo grew after 1996 is neither a surprise nor a sign of misuse of the program. Rather, it shows that DI is doing what it is supposed to do: maintaining essential economic security for individuals as they pass through their high-risk years for career-ending disabilities.  

Lawmakers need to act to secure DI finances in 2016 and beyond. The Academy’s research finds that Americans value Social Security, are willing to pay more to secure it for the future, and do not want to see benefits cut. Lawmakers have options to remedy the DI shortfall in ways that reflect Americans’ widespread agreement on how to strengthen Social Security.

William J. Arnone is chair of the Board of Directors of the National Academy of Social Insurance and a former Partner with Ernst & Young LLP.  G. Lawrence Atkins is President of the Academy and Executive Director of the Long-Term Quality Alliance.