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Dec 12, 2011

What Happens If The Disability Trust Fund Runs Out Of Money?

     Most people think there is only one Social Security trust fund but there are two. The one most people don't know about is the Disability Insurance Trust Fund. It has much more immediate problems than the Retirement and Survivor's Insurance Trust Fund. The Disability Insurance Trust Fund is predicted to run out of money in 2018. Restoring the Disability Trust Fund to health isn't that big a deal.A small reallocation of the FICA tax would do it with little effect upon the Retirement and Survivor's Insurance Trust Fund. You may have noticed, however, that Republicans have been taking hostages lately, refusing to agree to routine measures that prevent catastrophes, in order to achieve leverage. This tactic may have run its course as the public is tiring of crises and Democrats seem willing to practice brinksmanship themselves. Still, there is a very real threat that Republicans will attempt to use the problems of the Disability Insurance Trust Fund to force dramatic changes in Social Security's disability programs.
     It's impossible now to predict whether there will be a crisis in a few years or what the Republican demands or Democratic response might be. It may be worth looking though at the question of exactly what looms if there is no agreement. My first thought was that there won't be a crisis because there is already authority for borrowing between the Trust Funds. Unfortunately, my memory failed me. There was such authority at one time but it expired in 1987. Let's hope this authority can be quietly renewed before 2018. My second thought is to wonder just how benefits might be paid if the Disability Insurance Trust Fund runs out of money because the exhaustion of the Disability Trust Fund does not mean that there will be no money to pay benefits. Actually, there will be enough money to pay about 84% of the benefits since there will still be revenue coming into the Disability Insurance Trust Fund, allowing some benefits to be paid out of the revenue stream. Would Social Security just reduce each month's check by 16%? Probably, but a Congressional Research Service study on the subject tells us that the Disability Trust Fund running out of money would be terra incognita. There is no clear statutory answer. Perhaps, the answer would be to delay each month's checks until sufficient funds are available to cover them, making each check later and later.

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  • 13 Comments:

    Anonymous Anonymous said...

    how about just performing disability reviews until we have reduced the rolls by 16%...at least then we would be closer to paying only those who are actually disabled.

    Or, do away with child SSI...exactly what is the purpose of this program anyway?

    1:03 PM, December 12, 2011  
    Blogger Don Levit said...

    The only real money that the Disability trust fund has is the new money coming in.
    All the dollars in the trust fund (principal and interest) have been loaned to the Treasury.
    The dollars cannot be in the Treasury (and spent) and in the trust fund, at the same time.
    The trust fund is merely an accounting mechanism that shows how much money can be taken from the Treasury without am appropriation.
    It is the same way government pays for all expenses, with or without a trust fund - with new revenues AS IF THE TRUST FUND DID NOT EXIST!
    Don Levit

    1:19 PM, December 12, 2011  
    Anonymous Anonymous said...

    "how about just performing disability reviews until we have reduced the rolls by 16%"

    I have an idea. How about reducing the $80,000-162,000 dollar salaries and bonuses or so being paid out instead of making erroneous cdr decisions in an effort to balance the budget.

    Signed,

    the disabled

    2:27 PM, December 12, 2011  
    Anonymous Anonymous said...

    A1:03 PM: SSI isn't paid out of the Social Security trust funds; it's paid from general tax revenues. I do agree that that program should be abolished, though.

    4:23 PM, December 12, 2011  
    Anonymous John Herling said...

    Don Levit: as you well know, the trust fund moved to Treasury consists of loans, so that the trust funds have IOU's, which can be called in when necessary.

    4:48 PM, December 12, 2011  
    Blogger Don Levit said...

    John:
    The calling in of the Treasuries is what I meant by the trust fund balance having a draw on the Treasury without an approprreisation.
    The point is that to finance the draw on the Treasury, it takes new revenues AS IF THE TRUST FUND DID NOT EXIST. The trust fund makes it no easier to pay benfits, from a financial dynamics perspoective, than if there was no trust fund at all.
    Don levit

    5:10 PM, December 12, 2011  
    Blogger No Saj said...

    Don, no matter how you want to characterize the trust fund, it's money we paid into it and it's money we are entitled to have paid back. And hey, if the gov't loses it or reappropriates it or whatever, I don't really care. If the treasury can produce nearly $8 trillion out of thin air, they can certainly pay back these IOUs.

    http://dailycaller.com/2011/12/01/congress-was-unaware-of-7-77-trillion-in-secret-fed-loans-ahead-of-tarp-vote/

    10:55 AM, December 13, 2011  
    Anonymous Anonymous said...

    It is all paper, just print some more Federal Reserve Notes. Pay for the paper and ink out of the Federal Reserve Notes printed.

    There is a classic movie, "Panco Via" showing the revolutionary Mexican goverment paying of the French currency printer for a delivery of new Mexican bill with some of the just printed bills.

    12:50 PM, December 13, 2011  
    Anonymous Anonymous said...

    http://citizens4justice.com/?p=11

    2:44 PM, December 13, 2011  
    Blogger Don Levit said...

    No Saj:
    I agree with you the government needs to pay back the IOUs.
    Apparently, however, there is a huge disconnect between how you, I, and the public views the government's commitment to pay back the IOUs and how the federal government views the strength of their commitment.
    The FASAB, the accounting advisor for the federal government in a paper entitled "Accounting for Social Insurance, Revised Exposure Draft, Nov. 17, 2008:"
    Page 31 - The Alternative View (the present view of the FASAB)is that social insurance comprises two separate nonexchange transactions - the compulsory payment of taxes and the government's payment of benefits.
    Page 35 - "Social insurance benefits are not part of an exchange but are a welfare program and/or an annual general fund program like Medicaid and defense."
    Page 36 - "The Primary View (not the present view of the FASAB) - collecting taxes and paying benefits are not two separate non-exchange transactions, and the government should not be free to walk away from social insurance commitments."
    http://www.fasab.gov/pdffiles/socialins_exposurefinal.pdf.
    Don Levit

    6:39 PM, December 13, 2011  
    Anonymous Anonymous said...

    And if you stop collecting payroll taxes, even the illusion of the connection disappears. It becomes entirely a welfare program funded only by general revenues.

    9:44 PM, December 13, 2011  
    Blogger No Saj said...

    Don,

    I took a look at that FASAB document, as well as the SS 17 document it often referenced: http://www.fasab.gov/pdffiles/17_ss.pdf. Boy is that heavy reading. I had trouble making sense of it, but I did find a Heritage Foundation article on a similar FASBA report from 2006 which helped me make sense of it: http://www.heritage.org/research/reports/2006/10/a-better-measure-of-long-term-spending-fasab-proposes-changes-in-accounting-for-social-security-medicare.

    I learned some things:

    1. FASBA is mearly creating guidelines for accountants in agencies like OMB. They are certainly worth noting, but I wouldn't say they have the final word on this issue.

    2. You have Primary and Alternative views confused. According to Heritage, Primary is the main view, and Alternative is the, well, alternate. Sort of like Majority/Concurring and Dissenting opinions in the Supreme Court.

    3. The Heritage Foundation article (Heritage is conservativet, for all those who don't know) points out this statement in FASBA's Primary view:

    "The Primary view members ... observed strong similarities, in their view, between these social insurance programs and private sector pension and retiree health benefits and cited the need for formally recognizing their financial commitments."

    4. It is also worth noting that the report you quote is an 85 page document, in which only a small handful of phrases (that are found primarily in the appendix, have little to do with the main purpose of the report, and are included only for the sake of helping to explain the argument of the minority opinion) support the idea of a blurred line between trust and general funds.

    Sorry for the long post, but compared to the amount of **** I had to read, it is peanuts. Thanks Don for making me read more about this issue, I feel quite a bit smarter now. I probably won't post again (I'm about done reading these esoteric papers, and at this point I'm sure Chuck is wondering why I'm hijacking his blog) but I'll read any response you make.

    12:36 PM, December 14, 2011  
    Blogger Don Levit said...

    No Saj:
    I am pretty sure I do not have the views mixed up, although it seems that way, by their names.
    I checked it out pretty carefully on the FASAB paper, which I would rely on more than the Heritage Foundation.
    The FASAB is the advisor for the federal gopvernment, similar to the FASB for private businesses and the GASB for state and local governments.
    If you go to fasab.gov, you will see how important their rulings are.
    Don Levit

    1:23 PM, December 14, 2011  

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