Is Social Security’s First Crisis Next Year?

Next year at this time an event many politicians assure us is far in the future is expected to occur:  One of the two funds comprising Social Security ― Disability Insurance (DI) ― will be depleted.

This is no surprise, although the issue has gone largely unnoticed by national political leaders and mass media.

In late July, Social Security’s six trustees warned:  “The DI Trust Fund reserves become depleted in the fourth quarter of 2016, at which time continuing income to the DI Trust Fund would be sufficient to pay 81% of DI benefits.”

Formally, Social Security is known as OASDI, Washington-speak for the Old Age, Survivor and Disability Insurance program.  The OAS portion is what most Americans think of as Social Security with its 48.1 million beneficiaries who are either seniors or survivors.

However, it is the smaller disability insurance (again, DI) part of OASDI that is in trouble.  Last year, $114.9 billion in income flowed into the trust fund, while $145.1 billion was paid out to 10.9 million beneficiaries.

The resulting $30 billion deficit was not the first; shortfalls date back to 2009.  With only $60.2 billion in reserve at the end of 2014, it does not take a rocket scientist to see why DI fund reserves will run out by 2016.

What happens next?  If Congress does nothing, in order to balance DI revenues and expenditures program payments would have to be cut almost 20%.

More likely, Congress will prove true to form and apply a last-minute “band-aid” to DI’s long-festering wound.  It can do this by diverting some of the Social Security taxes we pay toward future retirement to funding disability benefits now.

Members of Congress will then be able to claim “problem solved!”  Except it won’t be.

In their late summer report, Social Security trustees also shared important information about the more familiar part of Social Security (OAS) that goes to seniors and survivors.  First, they noted that trust fund spending has exceeded income, save interest earnings, since 2010.

Second, they projected that OAS reserves of $2,729.2 billion will be depleted in 20 years, or by 2035.  Diverting some of the payroll taxes we pay from seniors to the disabled will only hasten the date at which Social Security payments to retirees will face potential reduction.

There are alternatives to future benefit cuts, of course.  Elected officials in Washington could decide to restore Social Security to long-term health by trimming benefits of future retirees, extending the dates at which those retirees qualify for benefits, or, in a variety of ways, raising additional payroll tax revenues.

None of these options is attractive.  But, as next year’s projected depletion of Social Security’s disability insurance program shows, the alternative is far worse – “surprise” cuts in benefits already being paid out.

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