Charles Blahous Presentation for Mercatus Center SSDI Panel

Mercatus Center
Mercatus CenterMercatus Center
Charles Blahous
The DI Financing Challenge
Social Security’s Two Components:
OASI (Retirement) and DI (Disability)
What is separate:
-- Trust funds
-- Payroll tax (OASI = 10.6%, DI = 1.8%)
-- Eligibility/determination processes
-- Policy issues
What is integrated:
-- Primary Insurance Amount (PIA) benefit
formula
-- Many demographic/economic factors
DI’s Financing Structure: A Brief History
Old-age insurance established: 1935
Disability insurance established: 1956
Sen. George amendment (passed 47-45):
“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.”
Projected DI Income, Cost and Expenditures
(As a Percentage of Taxable Worker Wages)
Projected Total Soc. Sec. Cost, Income and Expenditures
(Theoretical Combined Trust Funds, as a Percentage of Taxable Worker Wages)
Soc. Sec. Actuarial Estimates
OASI DI OASDI
(Theoretical)
Long-term cost rate 14.57% 2.20% 16.77%
“ Income rate 12.02% 1.87% 13.89%
“ Imbalance 2.55% 0.33% 2.88%
% Benefits payable
upon reserve
depletion
75% 81% 77%
Date of projected
reserve depletion
2034 2016 2033
Long-term = 75 yrs. Figures in first three rows given as a % of
taxable worker wages.
Time Is the Enemy; on Verge of Defeat
OASDI imbalance closed in 1983 amdts: 1.82% of taxable payroll.
Current OASDI imbalance: 2.88%.*
By 2033: Over 4%.
Today: Could close gap by reducing benefits for new eligibles 20.8%.
If delayed until 2033: Even 100% reduction inadequate.
Trustees: such “strategies for achieving solvency would not be feasible if delayed
until (combined) trust fund depletion in 2033.”
* Would be higher under 1983 methodologies.
Spectrum of Responsibility
Most responsible (ideal):
-- Comprehensive action placing OASI/DI alike on financially sustainable
paths.
Least responsible:
-- Making problem worse by further delaying financial repairs (or
otherwise increasing costs).
Realm of the possible:
-- Enact as many improvements to financial outlook as can be agreed on
bipartisan basis.
Note: House rule requires improvement of >0.01% of taxable payroll if funds
reallocated between OASI/DI.
Should revenues be reallocated to DI?
-- DI will almost certainly need additional revenues, at least temporarily, to avoid
near-term depletion.
“If you look from now until 2016, there’s probably no other
alternative which could produce the desired results between now
and then.” – Secretary Jack Lew, 2014 Trustees’ Report release
-- Any such reallocation should be combined with substantive reforms rather than
enacted as a means of delaying them.
A standalone reallocation “might serve to delay DI reforms and much
needed financial corrections for OASDI as a whole. However, enactment of a
more permanent solution could include a tax reallocation in the short run.” –
2014 Trustees’ Report
How Did We Get Here?
-- Historically OASI/DI tax allocations re-set whenever significant changes to benefits enacted.
-- Exception: 1994 reallocation.
-- DI costs had risen >40% above 1983 projections (1984 legislation, recession).
-- Trustees recommended 2-step process: 1) tax reallocation, 2)substantive DI reforms.
“The Board recommended a reallocation designed only to meet the short-term needs of the DI Trust Fund, in
part because it is not clear whether the dramatic increase in the number of workers applying for the Disability Insurance
benefits that began in 1990 is a temporary phenomenon or a longer term, more permanent trend. . . . The Board of
Trustees recommended in December and reaffirmed when we met this month the need for the best possible research
regarding likely future disability experience. . . . Until this work is completed, there is, in our judgment, insufficient
information to design specific proposals for the long term. . . . the proposed reallocation for the short term will provide the
time and opportunity to prepare and enact any needed changes in a careful and orderly manner.”
-- The 1994 reallocation was designed to buy ten years, allowing time for action.
-- After the reallocation, the Trustees in 1995 called again for comprehensive action:
“While the Congress acted this past year to restore its (DI’s) short-term financial balance, this necessary
action should be viewed as only providing time and opportunity to design and implement substantive reforms that can lead
to long-term financial stability. . . .Changes in our society, the workforce and our economy suggest that adjustments in the
program are needed to control long-range program costs. Also, incentives should be changed and the disability decision
process improved in the interests of beneficiaries and taxpayers.”
-- The recommended reforms were never enacted.
-- Note: in 1992, the Trustees warned specifically against a further reallocation.
How to Approach DI Reform?
-- Stick around to hear following panels.
-- Divide causes of DI cost growth into two categories.
-- Part 1: Attributable to demographics/economics.
-- Make value judgment as to how much to raise taxes
vs slow benefit growth (spillover effects on OASI).
-- Part 2: Attributable to increased award rates.
-- Make value judgment as to how much to raise taxes
vs tighten disability-specific award procedures.
Summary and Conclusions
-- DI faces financing shortfall and imminent
reserve depletion (2016).
-- DI shortfall more immediate but no more
severe than OASI; reaching crisis point first
primarily because boomers hit DI before OASI.
-- The sooner both sides of OASDI are balanced,
the better; further delay injurious to Soc. Sec.
1 sur 12

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Charles Blahous Presentation for Mercatus Center SSDI Panel

  • 1. Charles Blahous The DI Financing Challenge
  • 2. Social Security’s Two Components: OASI (Retirement) and DI (Disability) What is separate: -- Trust funds -- Payroll tax (OASI = 10.6%, DI = 1.8%) -- Eligibility/determination processes -- Policy issues What is integrated: -- Primary Insurance Amount (PIA) benefit formula -- Many demographic/economic factors
  • 3. DI’s Financing Structure: A Brief History Old-age insurance established: 1935 Disability insurance established: 1956 Sen. George amendment (passed 47-45): “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.”
  • 4. Projected DI Income, Cost and Expenditures (As a Percentage of Taxable Worker Wages)
  • 5. Projected Total Soc. Sec. Cost, Income and Expenditures (Theoretical Combined Trust Funds, as a Percentage of Taxable Worker Wages)
  • 6. Soc. Sec. Actuarial Estimates OASI DI OASDI (Theoretical) Long-term cost rate 14.57% 2.20% 16.77% “ Income rate 12.02% 1.87% 13.89% “ Imbalance 2.55% 0.33% 2.88% % Benefits payable upon reserve depletion 75% 81% 77% Date of projected reserve depletion 2034 2016 2033 Long-term = 75 yrs. Figures in first three rows given as a % of taxable worker wages.
  • 7. Time Is the Enemy; on Verge of Defeat OASDI imbalance closed in 1983 amdts: 1.82% of taxable payroll. Current OASDI imbalance: 2.88%.* By 2033: Over 4%. Today: Could close gap by reducing benefits for new eligibles 20.8%. If delayed until 2033: Even 100% reduction inadequate. Trustees: such “strategies for achieving solvency would not be feasible if delayed until (combined) trust fund depletion in 2033.” * Would be higher under 1983 methodologies.
  • 8. Spectrum of Responsibility Most responsible (ideal): -- Comprehensive action placing OASI/DI alike on financially sustainable paths. Least responsible: -- Making problem worse by further delaying financial repairs (or otherwise increasing costs). Realm of the possible: -- Enact as many improvements to financial outlook as can be agreed on bipartisan basis. Note: House rule requires improvement of >0.01% of taxable payroll if funds reallocated between OASI/DI.
  • 9. Should revenues be reallocated to DI? -- DI will almost certainly need additional revenues, at least temporarily, to avoid near-term depletion. “If you look from now until 2016, there’s probably no other alternative which could produce the desired results between now and then.” – Secretary Jack Lew, 2014 Trustees’ Report release -- Any such reallocation should be combined with substantive reforms rather than enacted as a means of delaying them. A standalone reallocation “might serve to delay DI reforms and much needed financial corrections for OASDI as a whole. However, enactment of a more permanent solution could include a tax reallocation in the short run.” – 2014 Trustees’ Report
  • 10. How Did We Get Here? -- Historically OASI/DI tax allocations re-set whenever significant changes to benefits enacted. -- Exception: 1994 reallocation. -- DI costs had risen >40% above 1983 projections (1984 legislation, recession). -- Trustees recommended 2-step process: 1) tax reallocation, 2)substantive DI reforms. “The Board recommended a reallocation designed only to meet the short-term needs of the DI Trust Fund, in part because it is not clear whether the dramatic increase in the number of workers applying for the Disability Insurance benefits that began in 1990 is a temporary phenomenon or a longer term, more permanent trend. . . . The Board of Trustees recommended in December and reaffirmed when we met this month the need for the best possible research regarding likely future disability experience. . . . Until this work is completed, there is, in our judgment, insufficient information to design specific proposals for the long term. . . . the proposed reallocation for the short term will provide the time and opportunity to prepare and enact any needed changes in a careful and orderly manner.” -- The 1994 reallocation was designed to buy ten years, allowing time for action. -- After the reallocation, the Trustees in 1995 called again for comprehensive action: “While the Congress acted this past year to restore its (DI’s) short-term financial balance, this necessary action should be viewed as only providing time and opportunity to design and implement substantive reforms that can lead to long-term financial stability. . . .Changes in our society, the workforce and our economy suggest that adjustments in the program are needed to control long-range program costs. Also, incentives should be changed and the disability decision process improved in the interests of beneficiaries and taxpayers.” -- The recommended reforms were never enacted. -- Note: in 1992, the Trustees warned specifically against a further reallocation.
  • 11. How to Approach DI Reform? -- Stick around to hear following panels. -- Divide causes of DI cost growth into two categories. -- Part 1: Attributable to demographics/economics. -- Make value judgment as to how much to raise taxes vs slow benefit growth (spillover effects on OASI). -- Part 2: Attributable to increased award rates. -- Make value judgment as to how much to raise taxes vs tighten disability-specific award procedures.
  • 12. Summary and Conclusions -- DI faces financing shortfall and imminent reserve depletion (2016). -- DI shortfall more immediate but no more severe than OASI; reaching crisis point first primarily because boomers hit DI before OASI. -- The sooner both sides of OASDI are balanced, the better; further delay injurious to Soc. Sec.