Committee for a Responsible Federal Budget

Options for Reforming Disability Insurance

Jul 16, 2012 | Social Security

We have said before that the Disability Insurance (DI) portion of Social Security is too often overlooked, even though it has a more immediate funding problem than the Old Age and Survivors Insurance (OASI) portion. The Chief Actuary of the Social Security Administration estimates that the DI trust fund will run out in just four years. Perhaps because many people assume that lawmakers will transfer money from the OASI trust fund to the DI trust fund to maintain solvency, there has little been discussion of options to reduce DI costs or raise revenue for the program. CBO has changed that today with a report detailing options to bring the program's costs and revenue more closely in line.

For background, the DI program is funded by 1.8 percent of the 12.4 percent Social Security payroll tax. Due to aging of the population, some relaxed restrictions on eligibility, and the recession, costs have risen dramatically in recent decades, especially in the last five years or so (although they are projected to level out as a percent of GDP over the next decade). As we mentioned above, the DI trust fund is estimated to run out in 2016, at which point benefits will be automatically reduced by 20 percent.

The report specifically details the budgetary impact of nine cost-saving (two revenue options and seven benefit options) and two cost-increasing options. Those options are:

  • Increase the payroll tax rate by 0.4 percentage points to 2.2 percent
  • Increase the share of earnings on which the tax is applied to 90 percent (up from about 83 percent today)
  • Reduce benefits by 15 percent
  • Reduce benefits for beneficiaries 53 and older to mirror the penalty that early retirees face in Social Security's retirement program
  • Use the chained CPI for cost-of-living adjustments (COLAs)
  • Eliminate eligibility after age 62, instead putting beneficiaries in the retirement portion of Social Security
  • Increase the number of years a disabled person must work to four of the past six years, up from five of the past ten
  • Increase the age at which eligibility criteria are loosened
  • Extend the waiting period for collecting benefits from five to twelve months
  • Increase COLAs by one percentage point
  • Eliminate the waiting period for collecting benefits

CBO provides estimates for how much each of these options would affect the budget in 2022 in dollar terms and as a percent of program revenue or outlays in 2022 and 2037. The 0.4 percentage point tax increase is the only option that would fully close the 75-year imbalance for DI, although other options are also sizeable. 

Disability Insurance Options
 2022 Impact (billions)2037 Impact (% of shortfall)
Revenue Options
0.4% Payroll Tax Increase$28100%
Increase Share of Earnings Taxed$1347%
Benefit Options 
15 Percent Benefit Reduction$2284%
Reduce Benefits for People Age 53+$644%
Use Chained CPI for COLAs$313%
Eliminate Eligibility at Age 62**$28%
Increase Work Requirement$832%
Increase Age When Eligibility Criteria Loosen$120%
Extend Waiting Period$1144%
Increase COLA by One Percentage Point-$16-41%
Eliminate Waiting Period-$8-34%
   
Memorandum: DI Shortfall in 2022$420.32% of Payroll

Source: CBO, SSA
**Only includes savings net of increased OASI spending

In addition, CBO presents a few options for which they cannot estimate the budgetary effects. Among them include changes to DI's administration, such as increasing the number of "continued disability reviews" (CDRs) -- reviews of cases that are conducted while people are receiving benefits. CBO expects this option to have cost savings because the increased administrative costs are often outweighed by the spending reductions when CDRs find that some beneficiaries are no longer eligible for benefits.

Beyond options, CBO also presents reforms to the framework of the program itself. They suggest that the program's structure is outdated for the modern economy, where greater employment opportunities are available for people with disabilities. CBO says that changes to the program that encourage or discourage less work might be warranted, such as reducing the phase out of benefits or speeding up the reinstatement of benefits for workers who re-enter the workforce but become unable to work again. Alternatively, the program could be changed to a "partial disability system," where benefits are rewarded in differing amounts based on how debilitating a disability is, or employers could be involved in the provision of disability benefits.

CBO's report adds to a list of options that CRFB Senior Policy Director Marc Goldwein published in an op-ed a few months ago. Lawmakers would be wise to survey these pieces to see how they can make disability insurance solvent without having to dip into the OASI trust fund.