Expanding benefit rolls drains federal trust fund reserves

At current rates, money marked for workers with long-term disabilities will be exhausted by the 2016. (courtesy photo)

More people going on federal benefit rolls in the last several years, in Michigan and nationwide, is taking its toll at the federal trust fund for workers who left the labor force due to a long-term disability claim.

A new report last week by the board of trustees for the trust embroiled in the debate — the Old-Age, Survivors Insurance and Disability Insurance Trust Funds — indicates the fund that pays benefits to former workers with qualifying disabilities had just $60.2 billion in reserve assets at the end of 2014. That's down from $90.4 billion at the end of 2013.

The trust, established in 1957, has been losing money since 2008, when a slightly better than break-even year had put its reserve assets to an all-time high of $215.8 billion. At the current rate of cash burn, Social Security expects the trust to be depleted before the end of 2016.

RELATED: 1 in 10 Michigan workers now collecting disability

The Obama administration has called for an interim fix by shoring up disability with a share of payroll tax revenues that currently go toward retirement benefits. But the House of Representatives has previously blocked any transfer between the trusts without a broader Social Security reform plan.

An insolvency, or depletion of the disability trust, would not necessarily mean the government cannot pay benefits — only that it would have no reserves to pay benefits. The Disability Insurance Trust Fund that pays SSDI benefits collected $110.1 billion from payroll taxes in 2014, plus about $3.3 billion in interest income, and paid out $141.6 billion in benefits, plus some administrative costs, for a net withdrawal of more than $30.2 billion.

The federal Antideficiency Act prohibits government spending in excess of available or allocated funds. So once assets are gone, Social Security could continue disability on a pay-as-you go basis as payroll contributions continue.

That could mean reducing all disability benefits about 20 percent, delaying the schedule of payments, increasing the trust's income via a payroll tax hike, or a combination of these — so long as each year's revenue covers its expenses.

Some experts told Crain's the disability trust is running out of funds about the time that actuarial projections said it would, following the last reallocation back in 1994. But critics point out that actuaries once projected in 2004 that the fund would last at least a decade longer than it's expected to, and the program has more beneficiaries now than some projections called for before the recession.

Michigan accounts for 4 percent of all workers collecting disability insurance benefits nationwide, according to Social Security data, and the average monthly benefit to disabled workers is $1,146.

Another possibility for solving the financial conundrum is shifting funds from the separate Old Age and Survivors fund, which covers conventional retirement age benefits. In 1982, Congress granted temporary power to borrow $17.4 billion from disability insurance and the Medicare Hospital Insurance trust to up-fund OASI, ahead of an anticipated insolvency in 1983. In 1994, Congress approved a redistribution of the 6.2 percent Social Security payroll tax, from 0.6 percent going to disability insurance then, to 0.9 percent today.

But the much larger Old Age and Survivors Fund is itself projected to become insolvent in 2035, so any redistribution of funds to Disability Insurance theoretically hastens that fund's depletion.

The Obama administration budget proposal for 2016 calls for adjusting a portion of the 6.2 percent payroll tax that employers and employees alike pay into Social Security, to shore up the disability fund by $330 billion over five years. This would cause the larger retirement benefits trust to be depleted a year earlier, or around 2034.

But the House earlier this year passed a measure introduced by Rep. Sam Johnson, R-Texas, that would forbid the chamber from considering any such transfers between funds unless it comes with a broader set of changes that improve the funding position of both trusts.

Charles Ballard, a Michigan State University professor of tax policy and public economics, said restructuring the disability insurance program to adapt to recent changes in the workforce may be particularly difficult in the current political environment.

"The disability insurance program is itself 58 years old. It's an old program, and it's hard to come up with the political will to do a thorough review and reform of it," he said.

Disability Insurance Trust Fund (performance history, in millions of dollars)