Warning: Disability Insurance Is Hitting the Wall

By Charles Blahous. 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. Excerpts:

"The problem in a nutshell is that Social Security’s disability trust fund is running out of money.  The latest trustees’ report projects a reserve depletion date in late 2016.  By law Social Security can only pay benefits if there is a positive balance in the appropriate trust fund (there are two: one for old-age and survivors’ benefits (OASI), the other for disability benefits).  Absent such reserves, incoming taxes provide the only funds that can be spent.  Under current projections, by late 2016 there will only be enough tax income to fund 81 percent of scheduled disability benefits.  In other words, without legislation benefits will be cut 19 percent. "

"The cause of the problem is that DI costs have grown faster than the program’s revenue base.  In 1990, the cost of paying DI benefits equaled 1.09 percent of taxable wages earned by workers.  This year the relative cost is more than double that: 2.37 percent of the tax base."

"The biggest reason is the growing number of beneficiaries, though real per capita benefits are also growing.  Disabled population growth reflects several factors, including most notably the historically large baby boom generation moving through their ages of peak disability incidence (45-64).  In addition, today more women have been employed long enough to be insured for disability benefits than was the case in earlier decades.

The growth in beneficiaries exceeds prior projections even after taking these factors into account.  For example, the Chief Actuary reports that “the prevalence of disability among insured workers on an age-sex adjusted basis” rose by 42 percent from 1980 to 2010, even though there is no evidence suggesting that actual disability is much more common than it was thirty years ago. Instead the rise reflects causes ranging from a liberalization of eligibility criteria in 1984, to a surge in disability benefit applications when unemployment rose during the Great Recession."