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Social Security and 2016: What They Have In Common

June 25, 2014
What do American politics and 2016 have in common? It’s obviously the 2016 Presidential Election, right? Will the Democratic nominee be Hillary Clinton or Joe Biden? Can Chris Christie hold off his troubles on the George Washington Bridge to defend himself from the overzealous Ted Cruz? With so many Americans focused on the horserace coverage of 2016, major news outlets, from the New York Times to Politico, will be racing to cover Social Security reform.

Author: Anthony Cruz, C’15

What do American politics and 2016 have in common? It’s obviously the 2016 Presidential Election, right? Will the Democratic nominee be Hillary Clinton or Joe Biden? Can Chris Christie hold off his troubles on the George Washington Bridge to defend himself from the overzealous Ted Cruz? With so many Americans focused on the horserace coverage of 2016, major news outlets, from the New York Times to Politico, will be racing to cover Social Security reform.

But isn’t Social Security reform not due for another 10-15 years?  Welcome to what is sure to be an important issue in the 2016 presidential debates. Buzzwords will likely include Disability Insurance (DI), reforms, tax reallocation, means testing, welfare, government spending, etc. Though if the DI program faces trouble in 2016, why isn’t it receiving more attention? Is this a trivial issue, or are our lawmakers just as bad with procrastinating as us college students?

To get a better understanding of why 2016 is an important year (besides supporting/opposing Hillary), let’s quickly review the Social Security program.

The Social Security program is administered by the Social Security Administration (SSA) and is vitally important to the nation’s economic safety net for our older generations and the disabled. The two trusts funds of Social Security are Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).

OASI is the largest program and provides cash benefits to insured workers upon retirement. In Fiscal Year 2013, total program spending came in around $679.1 billion.

The DI program provides cash benefits to insured workers unable to work because of significant long-term disabilities. Benefits continue to be given until the disabled worker passes away, returns to work, or reaches full retirement age, where they will be moved to the OASI program. In Fiscal Year 2013, total program spending amounted to roughly $146.6 billion.

The DI program, however, is of primary concern in 2016. In 2013, DI revenues were at $111.2 billion and expenditures were at $143.4 billion, thus creating a $32.2 billion shortfall. Meanwhile, the trust fund was at $90.4 billion, as of the end of 2013, and there has been a significant increase in the DI enrollment.

What is causing this deficit? Increased enrollment is the primary culprit. At a June 2014 hearing in the U.S. Senate, Wharton Professor Mark Duggan offered several causes for this. One was that the increased enrollment has been due to subjective medical criteria. Within the past few decades, the amounts of DI awards given for mental conditions which may be more subjective has risen sharply, as opposed to medical conditions that have accurate testing measures like circulatory issues. If more objective testing measures could be implemented, they could limit enrollment.


Credit: Social Security Disability Insurance: Understanding the Growth and Possible Reform Options by Professor Mark Duggan.

Another reason for increased DI enrollment has been an extremely low percentage of recipients leaving the program. Consequentially, this has fostered a system of dependency that has contributed to a decline in the labor force participation rate.


Credit: Social Security Disability Insurance: Understanding the Growth and Possible Reform Options by Professor Mark Duggan.

Finally, other factors that contribute to DI enrollment growth include an aging population, less generous retirement benefits in the workplace, and a program that is correlated with the state of the economy.

 

POSSIBLE REFORMS

When the time comes in 2016 (barring economic distress) to reform the DI program, what will be some of the proposed solutions?

A few proposals from the Congressional Budget Office (CBO) include:

Raise the DI tax rate from 1.8 percent to 2.2 percent

At the increased rate, revenues would be higher than in CBO’s baseline projection by $28 billion in 2022.  In 2037, revenues would be higher than CBO’s long-term budget projection by 22 percent.  Such an increase in the tax rate would equalize costs and revenues, on average, over a 75-year time horizon but would leave a significant funding shortfall over the next few decades.

Increase the taxable maximum to cover 90% of wages for the DI portion of the payroll tax

Increasing the maximum earnings limit for the DI portion of the payroll tax to cover 90 percent of earnings – from its projected level of $113,400 in 2013 to $174,000 – would produce an additional $13 billion in revenues in 2022 and increase revenues by 8 percent in 2037.

Reduce initial benefits by 15 percent across the board

Reduce the DI program’s spending by scaling back the number of beneficiaries.

Increase the recency-of-work requirement to 4 of the past 6 years (from 5 of the past 10 years) 

This stricter eligibility requirement would reduce the number of workers who receive DI benefits by 4 percent and would decrease outlays for the program by $8 billion in 2022.  Expenditures on the program in 2037 would be about 5 percent lower.

One proposal from the Congressional Research Service (CRS):

Improve return to work incentives like mandatory work preparation counseling

In 2011, SSA terminated the benefits of only 0.5% of all disabled-worker recipients due to earnings above Substantial Gainful Activity (SGA).  One option is to require all future beneficiaries to participate in mandatory work preparation counseling in order to educate them on the variety of return-to-work services offered by SSA.

Professor Duggan also cites the need to increase DI recipients’ incentives to work and revisit the program’s medical eligibility criteria.

 

Working in the Senate Finance Committee this summer has allowed for me to learn about one of the most interesting and pressing fiscal issues that my generation will face, now and in the future. Although youth debate and interest in the social security program is minimal, it is sure to spark attention and a social media storm in 2016. It is amazing to think that we are paying into a system that requires so much money because of deficits that we probably will not be able to fully enjoy our retirement benefits when the millennials are in Congress.  It is my pleasure that Wharton PPI afforded me the opportunity to live in Washington D.C. and learn about one of the most important issues facing our nation.

 

 

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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