Disability Insurance Needs Reform

By Tejesh Pradhan & James C. Capretta of AEI.

"The 2017 report of the Social Security trustees, released in July, shows the Disability Insurance (DI) trust fund will be depleted of its reserves in 2028, five years later than projected in the 2016 report. New applications for disability benefits are coming in below the rates that were projected the previous year.

Some policymakers might conclude that these new projections relieve them of the responsibility to pursue serious reforms of the DI program. They would be mistaken. Even with the recent slowdown in disability claims, the DI trust fund is in severe financial distress and probably would already be insolvent were it not for stopgap legislation, passed by Congress in 2015, that temporarily shifted tax revenue from the retirement side of Social Security to pay for disability benefits. But shifting payroll tax receipts in this way is not a permanent solution to the problem because the retirement program is also racing toward insolvency and cannot afford the lost revenue.

Fundamentally, the disability program is projected to run out of funds because it has evolved away from its original design. The number of disabled beneficiaries has increased from around 1.5 million in 1970 to 8.8 million in 2016, driven by changing legal and societal standards.

Following the political backlash to the Disability Amendments Act of 1980 — which tightened oversight of DI benefits — the Social Security Disability Benefits Reform Act of 1984 placed greater weight on disability assessments by the applicants’ personal physicians and reduced the role of state-contracted medical examiners in making final determinations. The criteria for assessing the severity of pain and discomfort as well as mental illness were also loosened. What’s more, the increasingly subjective nature of disability decisions has made the program sensitive to economic conditions. During periods of slow economic growth, applications for disability benefits surge.

The consequences of these shifts can be seen in the pattern of benefit awards. The percentage of beneficiaries awarded benefits based on mental health and musculoskeletal impairments (such as back pain) has risen dramatically from 27 percent in 1982 to 53 percent today. The deep recession of 2007 to 2009 led to an additional 2.5 million applications for disability benefits relative to what would have occurred if the economy had kept expanding during those years.

In 1970, the disability program cost 0.8 percent of taxable payroll (taxable payroll is a measure of aggregate wages earned by all U.S. workers below the maximum wage subject to the Social Security payroll tax). This level of program spending could be financed with a payroll tax of just 1.1 percent. By 2008, disability program spending had doubled to over 2 percent of taxable payroll. The 2017 trustees’ report projectsthat total spending will rise to about 2.2 percent of taxable payroll over the long run. Trust fund income will stay steady at 1.84 percent of taxable payroll, which means the program will run a steady and unrelenting deficit under current law. In dollar terms, the disability trust fund has unfunded liabilities of approximately $1.0 trillion."