Federal disability trust fund on the brink

May 30, 2013: 5:42 AM ET
disability trust fund
The federal disability trust fund will be exhausted by 2016, according to estimates.
NEW YORK (CNNMoney)

Nearly 11 million people depend on federal disability payments ... but the system is on the verge of running short of money.

According to a government report from last year, the Social Security Disability Insurance program is expected to exhaust its trust fund in 2016, years before either Medicare or Social Security. If that happens, the revenues coming in would only be enough to cover about 80% of the payments due to the disabled and their families.

"It means benefits would be cut," said Virginia Reno, vice president for income security at the National Academy of Social Insurance. "That has never happened before."

The trustees of Social Security and Medicare will release an update on the health (or lack thereof in this case) of the disability program on Friday. The annual report will also provide new estimates for the exhaustion of Medicare's hospital fund, now predicted in 2024, and of Social Security's retirement trust fund, currently set for 2035.

Though the disability program is the smallest of the three, it will be the first that Congress has to deal with. And there's not much consensus about entitlement reform on Capitol Hill these days. Attempts to rein in Medicare spending have gone nowhere recently.

Disabled find employment at bakery

The Social Security actuaries have calculated two ways to shore up the disability program. The simplest solution -- and one lawmakers have agreed to in the past -- is to divert more of the Social Security payroll tax to the disability program and away from the retirement system.

Here's how it would work.

Currently, the combined rate paid by employers and workers is 12.4%. The disability program's rate is 1.8%, while the retirement system's rate is 10.6%. Congress could authorize increasing the share going toward disability payments to 2.6% for two years and then slowly cut it back to 1.8% by 2030. This would keep the disability fund solvent until 2033, but it would shorten the retirement system's predicted lifespan by two years due to lower payroll tax revenue.

The other approach, which is more controversial, would be to raise the disability portion paid by workers and employers by 0.2% each. That would keep the program solvent for 75 years. But there's little appetite among lawmakers to raise taxes these days.

Related: Disability claims skyrocket: Here's why

While there has been a lot of attention paid lately to the surge in disability payments since the start of the Great Recession, the Social Security actuaries predicted the trust fund would run out in 2016 way back in 1995. That was just after the last time Congress diverted tax revenues to it.

There are several reasons why the number of people collecting federal disability has soared to nearly 11 million, up from 8.7 million in April 2007.

The aging of the baby boomer generation is one of the primary drivers. Workers typically enter the disability program in their 50s. So the spike in recent years is not a huge surprise for simple demographic reasons.

Also, more women have entered the workforce in recent decades, making them eligible for the program should they become disabled.

Certainly, the economic downturn pushed more people into the disability program too. It can be much harder for the disabled to find jobs when the labor market is tight, experts said.

But some argue that Americans are abusing the system. It's too easy to get into the program and too easy to stay in it these days, they say.

"It's morphed from a program that pays benefits to stroke victims and cancer patients to people with mental illness and back pain," said Mark Duggan, an economics and public policy professor at the University of Pennsylvania's Wharton School. "A ton of people are super needy but it's grown way beyond what it should be doing. It's crying out to be reformed."

What Congress ultimately does remains to be seen, but if they don't take action, the disabled will have to make due with smaller checks.

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