CBO Highlights Challenges Facing Social Security Disability Insurance

A new report released this week by the Congressional Budget Office projects that Social Security’s Disability Insurance (DI) Trust Fund will be exhausted in 2022. At that point, CBO estimates that benefits would have to be reduced by about 20 percent.

The report also explores factors that most contributed to increased costs in recent years:

• A changing workforce. The Baby Boom generation was larger than previous generations and also had a higher rate of women participating in the labor force. When they were younger, these workers provided ample revenue to support a small number of beneficiaries. As this generation aged, they became more prone to disability and thus more likely to receive (rather than finance) benefits.
• Changes in policy. Reforms to federal law and DI eligibility criteria have expanded the number of individuals who are potentially eligible for benefits. For example, the full retirement age (FRA) for the Old Age and Survivors Insurance (OASI) program has increased in recent years. Because individuals with disabilities are only eligible for DI benefits if they are below the full retirement age, a higher FRA means more individuals would be eligible for disability insurance.
• The economic downturn. In order to be eligible for DI benefits, an individual must have a work-limiting disability that prevents them from engaging in substantial employment for at least one year. The recession caused by the 2008 financial crisis significantly increased unemployment, making it harder for individuals with disabilities to find work and thus incentivizing more to apply for benefits. Once accepted onto the rolls, less than 5 percent of beneficiaries permanently return to work, even in a healthy economy.
• Rising benefit levels. The formula for determining an individual’s initial DI benefit is indexed to average wage growth. Since average wages rise faster than inflation, the real cost of the program per beneficiary has increased. In recent years, the growth in average wages has been driven by income gains at the top of the economic spectrum, meaning DI benefits have actually grown faster than wages for many lower-earning individuals. This has made benefits relatively more generous (i.e., costly) and has also made it more attractive for individuals who may be on the fence about applying to the program.

Beyond DI’s financing challenges, there are other ways that the program can be enhanced. Last year, BPC’s Disability Insurance Working Group released a number of proposals for improving the program’s effectiveness, some of which were included in the Bipartisan Budget Act of 2015. Yet more can still be done to improve the program’s operations.

CBO notes that many of the factors contributing to higher DI spending will slow significantly in the near future, but the report also offers some options for addressing the program’s existing shortfall. Policymakers could reduce spending by tightening the eligibility criteria for DI or reducing benefits for those who collect them, although CBO warns that these options may result in higher spending through other means-tested programs that serve similar constituencies (such as Supplemental Security Income).

Other options presented by CBO would increase revenue to the DI program, either by raising payroll taxes or by reallocating existing tax revenue from the OASI Trust Fund (as was done in last year’s Bipartisan Budget Act). The latter approach, however, would merely delay the problem, because OASI faces projected annual shortfalls roughly ten times as large as those of DI.

OASI and DI are inextricably linked. Both programs replace income for individuals who can no longer work, and the benefits provided by OASI pick up at full retirement age where DI leaves off. As Baby Boomers enter retirement, a large number of beneficiaries will move from DI to OASI (exacerbating the latter’s financing challenges).

BPC’s Commission on Retirement Security and Personal Savings recently released a package of recommendations that would make Social Security solvent for 75 years and beyond while also improving the efficacy of OASI. The best course of action would be for policymakers to address the problems facing DI in a responsible manner that accounts for the challenges facing Social Security as a whole, ensuring that benefits can be reliably paid to all beneficiaries for years to come.