New rule to be adopted by congress possible negative impact on disability insurance beneficiaries

New Rule to be Adopted by Congress -- Possible Negative Impact on Disability Insurance Beneficiaries

DI receivers could be facing a 1/5th cut in their disability benefits due to a provision that is latent in the new rules to be adopted.

Disability insurance beneficiaries could suffer on account of a provision that is latent in the new rules that the House Republican majority plans to adopt for the 114th Congress. They could be facing a one-fifth cut in their disability benefits by late 2016. In the United States, Social Security has two components, the disability insurance program and the Old Age and Survivors Insurance (OASI) program, for which almost all Americans become eligible for this when they retire. These two programs have always been treated as one and money is moved from one to another in case one is running short of funds and the other has a lot of money. In fact, according to Kathy Ruffing of the Center on Budget and Policy Priorities, such allocation in both directions has taken place at least 11 times since 1968.

The new provision would bar the House from shifting some payroll tax from the retirement trust fund to the disability insurance trust fund. It has been drafted with the objective of protecting the Old Age and Survivors Insurance (OASI) Trust Fund from diversion of its funds to finance the DI (Disability Insurance) system. However, there is widespread anxiety regarding this new provision that would prevent redirecting payroll tax revenue from the retirement program unless as part of a larger plan to improve the finances of Social Security by either raising taxes or cutting benefits.

SSDI Granted after a Thorough Medical Review

Applicants for Social Security disability benefits are numerous with laid-off workers and aging baby boomers. Compared to ten years back, the applications have increased by nearly 50% with disabled people losing their jobs and failing to find new ones in the current US economy. This has resulted in a very difficult situation with many applicants having to wait two years or more before their cases can be settled, most of the time with the help of disability lawyers. At present, about 11 million people receive disability benefits and 48 million receive Social Security retirement or survivor benefits. These benefits are granted on the basis of a thorough review of the applicant’s medical records to determine eligibility.

SSA’s disability standards are stringent and to be eligible a person must have worked at least one-fourth of his adult life and been working in at least five of the previous ten years. Workers who are younger than

31 have to show proof of employment for at least half the number of years after turning 22. Children are eligible for Supplemental Security income. A person has to be too impaired to earn even $1040 a month on his/her own. Initially, the administration approves only just more than a quarter of the applicants, and an additional 13% or so qualify on appeal. Totally, only 41% of the applicants end up with benefits.

However, there are observers who are of the view that many candidates receive the benefits through fraudulent means, which also may be the reason for the phenomenal increase in the number of applicants.

It is also unclear whether fraud exists in the DI program or in the retirement program.

The Threat and a Possible Solution

The looming threat is that the trust fund for the disability program will be exhausted sometime towards the latter half of the year 2016. According to projected figures, the program will collect payroll taxes only sufficient to cover 81% of the benefits at that time. This would result in 19% cut in benefit payments. Let us look at the math here. Social Security is supported by 12.4% tax on wages up to $118, 500, half of which is paid by employees and half by employers. 10.6% of wages that constitutes most of the payroll tax goes to the retirement fund. It is the remaining 1.8% that is received by the disability fund. By 2034, Social Security’s disability fund is expected to be exhausted, when it would be collecting payroll taxes just sufficient to pay around 75% of benefits. Though SS has reserves in the region of $2.7 trillion, the retirement program has been paying out more than its collections since 2010. At the same time the disability program has been doing the same since 2005. If both funds are combined, it is expected that there will be enough money to pay full benefits until 2033, which makes more time available to find a feasible solution.

Social Security Advocates Much Disconcerted

The new rule has been received with much perturbation by Social Security advocates. They do not think that this change to House rules can serve any purpose. It will only serve to cut benefits for Americans who have worked hard all their lives, paid taxes and depend totally on their social security benefits including DI to survive.

According to SS advocates, there are plausible reasons for the growth of DI beneficiaries. The baby boomers are entering their fifties and sixties; there are more women in the job market and a consequent

rise in the number of DI beneficiaries, and the rise in SS’s full retirement age. Diverting funds to DI would not pose any threat to the retirement fund because the latter is much bigger than DI. This step would prolong the DI trust fund by 17 years, i.e. from 2016 to 2033, and advance the retirement fund’s depletion by just one year, i.e. from 2034 to 2033. If the reallocation of funds is allowed, it would give policymakers sufficient time to address the issue of SS solvency in an effective manner. Another important point in this regard is that most disability recipients are aged people and so replenishing DI would help senior US citizens. 70% of disabled employees are age 50 years or older, 30% are 60 or older and 20% are 62 or older.

Neutral observers such as the American Bar Association are of the opinion that it is only reasonable and vital that payroll taxes are reallocated.