Lorenzen: Comprehensive Social Security Reform is Best to Address SSDI Insolvency

Ed Lorenzen, Senior Advisor for the Committee for a Responsible Federal Budget, testified Wednesday in front of the Ways and Means Social Security Subcommittee on maintaining the solvency of the Social Security Disability Insurance Trust Fund.

Without congressional action, the trust fund reserves will be depleted next year. The exhaustion of the DI fund, one of the upcoming fiscal speedbumps, would result in a roughly 20 percent across-the-board benefit cut. The President has proposed reallocating money from the Old Age fund to bolster the DI fund. This measure, known as a reallocation, has sparked much debate after a new House rule was adopted requiring legislation implementing such a transfer to also include reforms.

Proponents argue that reallocation is a routine measure, enacted numerous times in the past, and is therefore adequate in the current situation. In his testimony, Lorenzen explained that previous reallocations have often been accompanied by reforms, a precedent that's particularly important to follow this time.

After a thorough review of past reallocations, Lorenzen reaches four major conclusions:

  • First, prior reallocations have typically been accompanied by reforms to improve overall solvency. Accordingly, the new House rule requiring some improvement to solvency is more consistent with past reallocations than current proposals for a clean long-term reallocation without reform.
  • Second, prior reallocations generally rebalanced payroll taxes to align revenues with the relative costs of each program and also shifted revenues from the trust fund in a stronger actuarial condition. Neither would be the case with a reallocation enacted today. The Old Age trust fund faces a greater long-term shortfall and the President's proposal would transfer money away from that program.
  • Third, when clean reallocations were enacted in the past, they were intended to avoid imminent trust fund depletion and buy time for Congress to enact legislation to improve solvency. However, reallocations intended to buy time never resulted in action being taken until the trust fund was facing depletion again. That is a risk we cannot afford to take again given the entire Social Security trust fund is facing depletion in less than two decades. In 1994, the combined trust funds were expected to remain solvent for 40 years.
  • Lastly, Lorenzen argued that the SSDI trust fund depletion should be an impetus for comprehensive Social Security reform that addresses solvency of both OASI and DI programs. Failing that, any reallocation should be for a limited period of time and accompanied by modest changes improving overall trust fund solvency, as well as reforms improving the DI program, along with a process that will facilitate action on comprehensive reform in the near future, such as that proposed by Reps. Delaney and Cole. Addressing depletion of the DI trust fund in the context of comprehensive Social Security reform would provide policymakers with a much broader range of options on both the benefit and revenues side to improve solvency of both the DI and the OASI program, which faces the larger long term shortfall.

Lorenzen warned that the experience of the 1994 reallocation suggests that doing a clean long-term reallocation of payroll taxes – extending solvency for several years – will ease pressure on policymakers to address the Social Security shortfall and result in inaction until the trust funds are again facing depletion.

Several of the questions from lawmakers focused on whether this is a crisis manufactured by the new House rule. However, Lorenzen explained that this is not a manufactured crisis, but a real problem caused by the imminent depletion of the DI Trust Fund. He added that the fact that Congress has known about this problem since 1994 and chosen not to act does not make it any less of a crisis, and noted that it was a warning about the even larger crisis that would result if Congress failed to address the depletion of the combined OASDI trust fund by 2033.

Lorenzen was joined by Chuck Blahous, a public Trustee for the Social Security Trust Funds, who also urged Congress to make substantial reforms to the Social Security system now rather than waiting for the next depletion. He stressed that the sooner the reforms are made the more easily we can avoid insolvency, saying "the window of opportunity to preserve Social Security's historic financing structure will close long before 2033, and might well be closing soon or even now." Blahous also reminded the subcommittee that any action not ensuring the long-term sustainability of Social Security is not in the best interest of those who benefit from the program.

The hearing ended on a bipartisan note, with members on both side of the aisle expressing the desire for a bipartisan solution to the insolvency of the DI Trust Fund. Ideally, DI solvency would be addressed as a part of comprehensive Social Security reform which restored solvency to the entire Social Security System. You can see the impact of different Social Security solvency proposals by checking out The Reformer, our interactive tool to fix Social Security.

Lorenzen acknowledged that it may be too late to avoid some level of reallocation or interfund borrowing, but urged policymakers to accompany any transfer with policies to improve the way SSDI serves its beneficiaries, in addition to measures to improve solvency of both parts of the Social Security trust fund. This could be done through a greater emphasis on helping individuals early on, when they could remain in the labor force if provided appropriate supports; reforms determination and adjudication process; measures to improve program integrity; or better interaction with other programs. The McCrery-Pomeroy SSDI Solutions Initiative is committed to generating the kind of viable proposals to improve the program that policymakers should consider as the trust fund depletion approaches. 

See the testimony on our blog from yesterday or on the Ways and Means streaming website.

Lorenzen provided further information on the issue in response to questions for the record from Chairman Johnson. You can read his answers here.