A New ‘Save SSDI Plan Could Derail Social Security

A New ‘Save SSDI Plan Could Derail Social Security

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The urgent financing crisis facing Social Security Disability Insurance (DI) is giving rise to suggestions that the DI Trust Fund be merged with Social Security’s larger Old-Age and Survivors Insurance (OASI) Trust Fund. These two components of Social Security have been kept separate thus far since their inceptions. Of the two, DI currently faces the much more immediate (2016) threat of depletion. Combining the two funds would allow disability benefits to be paid from payroll taxes currently earmarked for Social Security retirement benefits. The following factors should be borne in mind if any such policy change is considered.

1: Historical Rationale for Separate Trust Funds. Social Security’s retirement and disability benefit systems were enacted at different times with separate financing arrangements. Social Security’s old-age benefits were enacted in 1935 during the Franklin D. Roosevelt presidency; for roughly the first two decades thereafter Social Security had but one trust fund. Disability insurance was established in 1956 during the Eisenhower presidency. 

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 When Social Security was first established, lawmakers assured the public that its retirement pensions would be self-financing, funded by workers’ “contributions, not taxes,” and that benefits would not become a drain on the federal budget. When disability insurance was added later, similar promises were made that it would also be self-sustaining, and not siphon funds from Social Security’s retirement program or from the general budget. 

The addition of disability benefits to Social Security was intensely controversial. After many years of lobbying by advocates, the House of Representatives included disability benefits in a Social Security bill passed in 1955. The Senate Finance Committee later stripped the disability provisions from the House legislation, its committee report stating that “paying cash disability benefits to insured workers under the old-age and survivors insurance program would not be desirable.” The committee’s report couched its rationale in terms of protecting Social Security’s primary retirement benefit function, saying that “the old-age and survivors insurance system is on a sound financial basis; your committee strongly believes that it must be kept so and should not be altered by adding a benefit feature that could involve substantially higher costs than can be estimated.” 

Supporters of disability insurance responded to these concerns by introducing an amendment (George et al) during Senate floor consideration to finance these benefits through a separate trust fund. As Senator Walter George (D-GA) stated during floor debate:

The moneys for disabled persons will not be commingled in any way with the funds for old-age insurance or for widows and spouses. The contribution income and the disbursements for disability payments will be kept completely distinct and separate. In this way the cost of disability benefits always will be definitely known and the costs always will be shown separately... a separate tax is to be levied to build up a fund which can be easily policed, which can never encroach upon the fund for widows, and for those who reach age 65, and for children and other beneficiaries.

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These assurances just barely overcame longstanding concerns about potential negative effects of DI on Social Security’s retirement program; the George amendment passed 47-45. 

President Eisenhower, who had long entertained misgivings about adding a disability component, cited the separate trust fund arrangement in his signing statement as one of the features making the new law acceptable. “A separate trust fund was established for the disability program in an effort to minimize the effects of the special problems in this field on the other parts of the program--retirement and survivors' protection.” The 1957 trustees’ report (and subsequent reports) similarly echoed that benefits for the disabled would be provided “with a financing arrangement that is separate from the old-age and survivors insurance system.” 

From time to time some have opined that the OASI and DI funds could be safely combined. For example, the 1979 Social Security Advisory Council recommended “the merger of the Old-Age and Survivors’ Insurance Trust Fund and the Disability Insurance Trust Fund into a single fund.” Lawmakers, however, rejected this recommendation on a bipartisan basis when passing the landmark program amendments of 1983. In short, today’s disability insurance system was enacted on the promise that it would be self-financing through a separate trust fund, and would not be permitted to draw from worker and employer contributions made for funding retirement benefits.

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2: The Self-Financing Principle. Merging the OASI and DI trust funds would implicitly require only that Social Security as a whole be self-financing, abandoning the requirement that each of its components be sustainable on its own. Once the principle of self-financing is abandoned for individual components of Social Security it becomes less clear where the line of fiscal responsibility will remain drawn. For example, Medicare’s two components of Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) arguably have more in common with each other than do OASI and DI, in that they serve essentially a single aged population. Yet Medicare HI is currently held to a much tighter fiscal standard than its partner SMI, the latter having an open tap on the general federal budget. If self-financing is abandoned for DI, it would become an obvious temptation to also do so for Medicare HI and to mix other functions of the Social Security Act as well. 

For many decades there was an unshakable bipartisan consensus supporting Social Security self-financing, based on a shared belief that the program’s unique political strength rested on perceptions that it paid its own way. I have written about how this commitment has eroded in recent years, threatening the program’s future. Self-financing requires that lawmakers make the tough decisions necessary to balance program income and expenditures. A merger of the trust funds would signify that lawmakers were no longer willing to uphold this ethic for Social Security DI.

3: The Perception of Earned Benefits. The politics of such a merger would likely be complex and daunting. To date there has been a general acceptance of workers all paying into Social Security disability insurance even though only those who experience a disabling condition withdraw benefits from it. The public thereby grants that individual workers may receive back from disability insurance far more or far less than they put in, requiring only that the program as a whole be self-sustaining. 

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This contrasts with Social Security’s retirement system, from which participants generally expect to withdraw benefits that in some way reflect the value of their own contributions. The public has long taken a dim view of using Social Security’s OASI fund for any purpose other than paying retirement and survivor benefits. It is not clear whether there would be general acceptance of diverting funds heretofore earmarked for retirees/survivors to finance disability benefits, and thereby reducing benefits payable in retirement.

4: The Risk of Delaying Necessary Financial Repairs. The DI fund’s currently impending depletion requires that lawmakers enact corrections before the end of 2016. A combined OASDI fund would by contrast not run out until 2033.  

If a fund merger induces lawmakers to further postpone needed financial repairs, the result would be a disaster for Social Security, potentially a fatal one. Program trustees (of which I am one) have repeatedly explained that significant further delays are sharply against the interest of program participants, and that strategies for maintaining solvency “would not be feasible if delayed until trust fund reserve depletion in 2033.”

By itself this does not suggest that the two funds could never be merged. The primary danger would come from merging the funds at a time when Social Security still faces a large financing shortfall. This could be avoided by considering a fund merger either after, or in the context of, legislation to close Social Security’s financing gap. The 1983 amendments set a precedent in this regard, including various changes to trust fund management along with reforms to achieve solvency. 

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5: Transparency versus Opacity. Social Security politics are divisive and difficult in part because the program promises much more in benefits than participant contributions have earned, while there is little transparency as to how income is being redistributed. This effectively causes program costs and tax burdens to rise steadily over time, as individuals demand the full payment of benefits they feel they have earned, even if those benefits are largely subsidized by younger taxpayers, who must experience rising tax burdens and net income losses to finance them. 

In my book Social Security: The Unfinished Work I argue that greater transparency would better equip Americans to make informed judgments about how expensive they want the system to become, and what benefit levels would be most equitable. Specifically, I explain that only about one-third of each worker’s contribution is earning a benefit for that worker, roughly one-third is redistributed from richer to poorer to provide a safety net, while the remaining one-third is being redistributed from younger generations to older ones, never to be returned under current law. 

Mixing the retirement and disability funds would add another layer of opacity to the system, in that it would no longer be explicit even what portion of each individual’s taxes were being used to finance retirement benefits, and what portion for disability benefits.

Merging the OASI and DI trust funds would be a significant departure from lawmakers’ previous promises that the establishment of disability benefits within Social Security would not reduce the funds available for paying retirement benefits. It could also have the adverse effects of further delaying necessary financial repairs, worsening operational opacity and weakening commitment to the self-financing principle. The best time to consider such a merger would be in the context of legislation closing the financing gaps of DI and OASI alike. 

This article was originally published in e21, Economics for the 21st Century.

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

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