What Happens When the Disability Insurance Trust Fund Runs Out of Money?

Posted by Jeffrey Brown on Aug 29, 2011

Filed Under (Retirement Policy, U.S. Fiscal Policy)

Last week, the non-partisan Congressional Budget Office (CBO) put out an update of the financial status of the Social Security system’s finances (using, by the way, new “infographics” to illustrate the issues).  To policy wonks like myself who follow Social Security’s more closely than we do the Major League Baseball standings, the report simply confirms what we already know – namely, that the Social Security system is on a financially unsustainable course and that it is doomed to insolvency unless Congress gets its act together and makes some difficult decisions.

What really hit the news cycles in the past week, however, was the fact that the expected date of insolvency of the Disability trust fund is now just five years and a few months away – the year 2017.  This is a couple of decades earlier than we usually talk about exhausting the Social Security trust funds, and thus, I suspect, this news has caused some confusion.  So this blog attempts to explain how the trust funds work, and what the exhaustion of the trust fund means for recipients of disability payments.

First, it is worth knowing that the Social Security program is really more than one program.  Formally, there is the OASI program (Old-Age and Surivivors’ Insurance – think of this as the program for retirees and their widowed spouses), and the DI program (Disability Insurance – this is the one that pays benefits to workers who have a disability that severely limits their ability to work).

Second, while we often talk about the “Social Security trust fund,” there are, in fact, two separate funds – one for OASI, and one for DI.  While these are legally separate funds, they are often talked about as a “combined trust fund,” and most of the debate about the long-term problems facing Social Security use data on the combined trust fund.  This masks, however, the fact that the current financing status of the OASI and DI programs are not exact duplicates.  Specifically, the DI trust fund is expected to be exhausted much sooner than the OASI trust fund – 2017 according to the CBO’s most recent estimate.

Third, while we economists can forever debate the economic meaning of the trust funds (I will spare you this debate for now), there is little question about the legal meaning of the trust funds.  Specifically, it is widely understood that so long as the DI trust fund has a positive balance, the Social Security Administration can continue to send out benefit checks to DI recipients, even if the tax revenue flowing into Social Security from the DI portion of the payroll tax (known as the FICA tax) is insufficient to cover benefit payments.  This is because the DI trust fund can redeem the U.S. government bonds that it is holding.  And as long as the U.S. Treasury does not default on its obligations, this means that the Social Security Administration has the legal authority to issue checks.

So, what happens if and when the DI Trust Fund runs dry in 2017?  Well, if Congress failed to act in any way (an outcome I consider implausible, and will say more about below), the Social Security would find itself in a position in which it did not have sufficient dedicated revenue to cover benefits.  The most likely scenario is that they would begin delaying the issuance of checks to beneficiaries.   Eventually, the backlog of checks would grow so long that it would amount to a benefit cut – beneficiaries may only get 11 checks per year instead of 12, for example.  This would be a terrible outcome, because no matter what your views on the role or size of government, it is hard to explain how reneging on payments to some of our most financially vulnerable citizens is the best way to close a budget shortfall.

You may wonder why the Social Security Administration could not just “borrow” some of the OASI money to pay the DI beneficiaries.  And the short answer is that the agency does not appear to have the authority to do this.  Rather, it would require an act of Congress to re-allocate the proportion of the payroll tax revenue that goes to each program.  As they did in the 1980s, for example, Congress could simply state that a larger fraction of the existing FICA tax go to DI instead of OASI.  This patches the short-term problem facing DI, and allows checks to go out.  Of course, it is also “robbing Peter to pay Paul” because it simply makes the OASI trust fund go dry that much sooner.

What we really need is thoughtful reform of both the OASI and DI programs.  Both are important programs to the well-being of individuals who are retired or disabled, but both programs are also not financially sustainable.  We need to adjust benefits, taxes or eligibility in order to bring the system back into long-term balance.

So the good news is that those who rely on the Social Security Disability Insurance program most likely have little to fear about the 2017 insolvency date, because Congress will most likely paper over that problem by reallocating the FICA tax.  But the bad news is that their ability to do so will most likely lead to further delays in making the serious reforms that these programs so badly need.