DI: the Sick Man of Social Security

by Bruce Webb

(Well it seems a little slow around the Bear Cave today, sorry if this seems like deja vu all over again.)

DI or Social Security Disability Insurance is maybe not in immediate crisis but it is not well. But then again it has been ailing for a long time and where the current recession has given the OAS (Old Age/Survivors) component of Social Security the sniffles, the already compromised immune system of DI has succumbed to pneumonia. Which doesn’t mean that both need to be rushed to the Emergency Room. Lets take a look at the Figures and Tables.

In this graph the dark line represents OAS and the gray line DI while Roman number I shows outcomes under the Low Cost alternative, II under the standard Intermediate Cost alternative, and III the High Cost all as seen from March 2008 in last year’s Social Security Report. In each case the lines track Trust Fund balances as a percentage of annual cost over time meaning that when they hit bottom Trust Fund assets are depleted, meaning that changes HAVE to be made on either the tax or benefit side for that particular program. But this is not one size fits all, the appropriate fix for DI may be much different that that for OAS, and certainly the urgency levels very.

For example under HIgh Cost DI was projected to go to Depletion in 2017, under Intermediate Cost in 2025, under Low Cost never, if fact it was projected to be vastly overfunded after 2025. But setting Low Cost aside we can see that under both High and Intermediate Cost that DI was in comparatively bad shape even before the depth of the current recession became apparent. If we turn around and examine this in dollar terms it looks like this:

In this table the combination of ‘Net contributions’ and ‘Tax on benefits’ represents Tax Revenues actually extracted from the current year economy while ‘Cost’ represents dollars actually expended. If ‘Net contributions’ and ‘Tax on benefits’ exceeds ‘Total’ Cost then dollars flow from Social Security to the General Fund, if they fall short then the flow goes the other way. Hassett and Biggs of AEI insist that this is the proper measure of ‘vanishing Surplus’ and so marks the time for action. I on the other hand prefer to use the CBO definition of ‘Surplus’ which includes interest earned on the Trust Fund balance. But squabbling over the terminology is to miss the point at hand, what AEI has done is conflate OAS and DI in an inappropriate way. Inappropriate at least when it comes to changing policy. Explanation below the fold.

In the normal course of events there is little harm in talking about THE Social Security Trust Fund, for most purposes that is how the Trustees discuss the matter, how CBO and OMB treat it for Unified Budget calculations, and how Dean Baker addresses it. And this is pretty well explained by comparing the combined OASDI TF ratios to the above figure separating OAS and DI out.

One you adjust for the difference in scale on the y-axis you can see that under Intermediate Cost that outcomes for combined OASDI are very little different from those of OAS taken alone with the former showing Trust Fund Depletion in 2041 while OAS alone showing it in 2042. And the reason is pretty simple, OAS at around $2.2 trillion is around ten times the size of DI at around $220 billion, OAS is the dog compared to the DI tail, however vigorously the latter wags it doesn’t move the whole dog much.

Which is where the AEI folk go astray, they saw some tail movement in February and let the tail wag the dog, when in fact the dog was in reality not moving much at all. If we pull back a little and examine DI numbers in isolation we can see that the combination of ‘Net contributions’ and ‘Tax on benefits’ fell behind ‘Cost’ early in 2006 as we saw $92 billion in tax revenues and $94.5 billion in cost over the year. The world didn’t come to an end, instead Treasury retired some maturing Special Treasuries and supplied GF cash to make up the difference. Since this didn’t require the entirety of the earned interest on the DI Trust Fund the TF balance still increased over the year by $8.2 billion. But per AEI definitions this is not a ‘surplus’ instead DI has been in deficit for almost three years and well before the current recession was even underway. The recession did have the effect of making DI’s outlook deteriorate, but that was only to accelerate a trend already in progress.

The Trustees put it this way last March. Bolding mine.

Assets of the DI Trust Fund were greater than 1 year’s expenditures at the beginning of 2008 and would remain above that level through the beginning of 2017. By the beginning of 2018, however, the trust fund ratio is projected to decline to 95 percent, indicating that assets would fall below the 100-per cent level sometime during 2017. Accordingly, the DI Trust Fund does not satisfy the Trustees’ short-range test of financial adequacy under both the intermediate and high cost assumptions. However, under the low cost assumptions the DI Trust Fund does meet the short-range test of financial adequacy, because assets remain above 1 year’s expenditures through the end of the short-range period,

Meaning that the claim that the current recession CAUSED the SS surplus however defined to ‘vanish’ is pure bunk. Under CBO scoring both combined OASDI and OAS by itself are in surplus and will remain so until after 2019, in reality the dog barely stirred, the dates of OAS TF shortfall and depletion hardly moving. Even if we use AEI’s preferred definition of ‘Surplus’ we see combined surpluses continuing to 2017 for OASDI and to 2019 for OAS alone which barely moves the outcome as seen on the graphs above.

On the other hand DI is kind of a sick puppy right now.

Where the Trustees projected a $3.3 billion cash deficit in 2008, reality returned a cash deficit of $8 billion. Where the Trustees showed a cash deficit of $4.6 billion for 2009, CBO now projects $20 billion. And where the Trustees projected that TF assets would stop growing and start shrinking in 2012 with TF Depletion in 2025, CBO reports that those assets started shrinking last year (I put it right around July per the TF Monthly Reports) and will go to Depletion in 2019, a six year difference from what the Trustees projected just a year ago.

So what is the proper policy response? We need to fix DI. And just DI and not let the opposition make the claim ‘Well since we are forced to fix DI we might as well fix OAS too.’ Well no, it is not clear that OAS is even sick. Certainly the economy gave it a chill, a system that relies on a fixed percentage of wage income is obviously not immune to double digit unemployment, and we would want to keep an eye on that cold and mild fever, in medical terms OAS in ‘under observation’. But that doesn’t dictate the kind of radical surgery AEI is pushing.

How do you fix DI? Well there are only three ways. One you can just cut benefits to current recipients. But it is not like those checks are that generous to start with. Two you can restrict eligibility. But current approval rates and times for that approval are already scandalous. Or three you can raise taxes. Something the people at AEI normally resist. Which in my opinion is why nobody raised the DI issue back in 2006 when by AEI definitions it first went into deficits, because while you can get some political mileage by attacking Boomers for not having enough regard for intergenerational equity there is not much payoff attacking people in wheelchairs or on oxygen or with pacemakers.

So if we are not willing to cut benefits to DI recipients or to make eligibility even harder to qualify for we are left with taxation. Per the Trustees the cost of a permanent fix for DI over the 75 year actuarial window was 0.24%. If we just wanted to fix it totally for the 25 year period to 2033 and partially after that we could reduce the initial fix down to 0.15% of payroll. Table IV.B4.—Components of Summarized Income Rates and Cost Rates, Calendar Years 2008-82[As a percentage of taxable payroll]. Meaning that for a median income family with total wages of $50,000 would mean $120/year or $75/year respectively. Or we could look at this Table and conclude ‘Hell we still got $216 billion in credit with the Treasury, why not just draw on it rather than raise taxes even a little bit in this recession.’

So yes DI is kind of sick, and probably we should undertake some longer term cure, but we certainly can wait until we see how and if the economy recovers. But the last thing we should do is let people fundamentally hostile to Social Security to start with to rush us into an overhaul of the whole system because of a one-time blip in monthly numbers that itself is mostly the result of incomplete context. (See immediately previous posts in the series.)