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Budget Deal: SSDI Gets A Bailout from Social Security Trust Fund

The latest reports on the budget deal show some entitlement changes coming to Social Security Disability Insurance (SSDI) and the Social Security Trust Fund. The text of the bill is here.

According to analysis of the deal, spending would be increased “by $80 billion over two years, not including a $32 billion increase included in an emergency war fund. Those increases would be offset by cuts in spending on Medicare and Social Security disability benefits.”

The deal sought some much needed structural changes to the SSDI program, because it was slated to reach insolvency sometime in 2016 — which, of course, would play right into the Presidential election cycle.

Some of the proposed changes include: “a medical exam now required in 30 states before applicants could qualify for benefits would be required in all 50 states. That change was projected to save the government $5 billion.”

Another reform looks to be restructuring work and benefits reviews, “in which some people who receive disability benefits could earn money from working with less fear of triggering a review that can result in benefits being cut off. Instead, people participating in the projects could see their benefits gradually curtailed as their income rises … ”

While these changes are a start, they come at a price that no one in the media is really talking about in depth. The NYTimes casually mentions that there were be a reallocation of “funds among Social Security program trust funds to ensure solvency of the disability insurance program.” That sounds well and good, until you get to the details.

The reallocation of roughly $150 billion over the next three years comes from the Social Security Trust Fund in order to rescue the nearly bankrupt SSDI Trust Fund; in other words, we are borrowing money from one entitlement program to another!

SSDI was slated to receive across-the-board 20% cuts in 2016 as a way to deal with its nearly-depleted funds. But that is a very messy topic for a very messy election year. This deal papers over the SSDI funding problem — infusing it with cash from Social Security over the next three years, and extending the insolvency question for the disability question until around 2022.

Congress has been kicking the can down the road on disability insurance reform for decades and 2016 should have been the end of the road—time for meaningful reform. Instead, policymakers want to provide a little more roadway for the disability insurance program by whacking off a portion of Social Security’s roadway.

This isn’t the first time the disability insurance program has run out of money and it isn’t the first time Congress has kicked the can down the road. As recently as 1994, the disability insurance program was about to run out of money and Congress increased the disability insurance payroll tax by 50 percent, from 1.2 percent to 1.8 percent. That increase was coupled with a stark warning that the disability insurance program was in dire need of additional reforms to sustain it over the long run.

What has Congress done to reform the disability insurance program since then? Nothing.

Rather than looking to improve the efficiency and integrity of the program, Congress sat idly by as the percent of the working-age population receiving disability insurance benefits increased from 2.8 percent in 1994 to 5.1 percent today.”

This cash infusion — from Social Security of all places! — merely obfuscates the larger question of true entitlement reform. Using Social Security Trust Fund money was a perfect cover for lawmakers because it can be explained as a routine “reallocation of Social Security funds”, without explaining it is essentially robbing Peter to pay Paul. It is a known fact that both programs are slated to run out of money in the future. This deal just extends the life support for one program, while shortening the life of another.

Though lawmakers made a few minor changes to SSDI, it wasn’t enough. There are major systemic problems with SSDI. Just last month, a report by the Government Accountability Office (GAO) found that for 5 years (FY2009-FY2013), disability payments totaling $371.5 million were overpaid to many individuals — all while the program is running out of money. In this instance, “the SSA’s ‘internal controls’ rely on beneficiaries to self-report overpayments.” Why not fix this problem? Start somewhere. But that would be hard. It’s easier to throw new money at the problem (again) instead of actually tackling tough entitlement reform, thereby kicking the can down the road for future lawmakers to deal with (again). All this deal did was hide the problem so that it did not become an issue for any of the Presidential candidates next year.

Last January, I wrote on this topic, reporting a conversation with Charles Blahous, (a Trustee of the Social Security and Medicare Trust Funds,) about the Social Security situation. Blahous described how “the problem is not that disability needs a bigger share of the overall payroll tax than it now has, but that Social Security as a whole faces a financing imbalance that needs to be corrected. The single most irresponsible response to the pending [disability insurance] trust fund depletion would be to do nothing other than paper it over with a reallocation of funds, delaying meaningful corrective action as long as possible.”

Unfortunately,that’s JUST what we did.

Social Security Administration Overpaid Millions in Disability Benefits

Washington Free Beacon had a sobering article about the lack of fiduciary responsibility in the Social Security Administration. A report by the Government Accountability Office (GAO) found that for 5 years (FY2009-FY2013), disability payments totaling $371.5 million were overpaid to many individuals. “The report examined how concurrent Federal Employees’ Compensation Act (FECA) payments affect Disability Insurance (DI) overpayments.”

The most recent annual Social Security Trustees report showed that the projected date of insolvency for the Social Security Disability Insurance Trust Fund is late 2016, a date that remained unchanged from the prior year. With this crisis looming in the background, the report of overpayments is especially concerning. From the article:

“The GAO found that SSA did not detect concurrent FECA payments for about 1,040 individuals during at least one month from July 1, 2011, through June 30, 2014.

To test SSA’s internal controls, GAO randomly selected 20 beneficiaries for review. In all 20 cases, SSA’s controls failed to detect and prevent overpayments. In seven of the cases, SSA did not detect overpayments for more than a decade, and each of these individuals received $100,000 in overpaid benefits.

One of these seven individuals received FECA benefits in the 1980s and was approved for disability benefits 14 years later in 1994. The GAO found that this individual received $200,000 in overpayments for more than 20 years.

The SSA’s “internal controls” rely on beneficiaries to self-report overpayments.

“SSA officials told us that if beneficiaries do not self-report benefits, there are no system prompts that would alert SSA staff to ask beneficiaries if they are receiving any workers’ compensation benefits, including FECA payments,” states GAO. “SSA officials agreed that relying on beneficiaries to self-report benefits presents a challenge in identifying overpayments related to the concurrent receipt of FECA benefits.'”

Congress is aware of the projected date of insolvency, but has yet to agree on a path forward. What’s more, the date roughly coincides with the 2016 election, so of course no one is willing right now to make any decisions or provide any possible solutions. Without any changes, benefits will be reduced by nearly 20%. Currently the Disability Trust Fund provides more than $100 billion a year to roughly 11 million recipients, making it the largest government assistance program in the country.

Social Security is not Pay-As-You-Go and Its Unfunded Liabilities are Massive


As a CPA, it is frustrating to hear Social Security repeatedly being described as a pay-as-you-go (“PAYGO”) system, which gives credence to something that is terribly incorrect. PAYGO is not a system at all; rather it is a method of reporting that hides earned realities, making it totally unacceptable to accounting professions, the SEC, and virtually everybody outside the government.

The fallacy of calling it PAYGO is that, in reality, the cash includes everything we are getting in, while the cash out doesn’t include the responsibilities due to come. The cash out formula specifically excludes the trillions promised to existing workers in the future, (while their Social Security tax is being collected today). It doesn’t really describe, as part of the expenses being incurred this year, the amount of future retirement benefits being earned and promised.

In contrast, if you give an insurance company today $100,000 to pay you a retirement pension beginning when you retired at the age of 65, the insurance company (logically and legally), the insurance company would report this as an asset offset by a liability to provide $100,000 of payments in the future. The Social Security system, however, reports that as $100,000 of profits in the year received, while the obligation to account for and provide future benefits is incredibly ignored.

When the cash in is received, that money egregiously goes into the government’s general tax revenue account and not in any Social Security Fund (anymore). The Social Security Administration merely collects and records the gross Social Security tax receipts, while the net amount, after deductions, is sent to the IRS. Yet the gross amount recorded is the amount spent by the government, resulting in the staggering deficit we face today. Therefore, it is outrageous for anyone to say that accounting for the system can be done simply by looking at the cash in-cash out.

The biggest problem with this arrangement is that it puts the burden on the wrong people. We have a growing population of retiring taxpayers and the current generation is paying off the obligation the older generation never paid for. It is a Ponzi scheme in which, depending on how you play it, you manipulate who is paying whose obligation. Therefore, the PAYGO method doesn’t work because the government takes 100% of the money they receive and they do not put away; they need it to pay today’s debt to another taxpayer, while today’s payee is stuck holding the bag.

For several years now, the Social Security trustees reports have noted Social Securities unfunded liabilities – those promises made to individuals solely in exchange for amounts they have already paid for – to be trillions in deficit. Social Security in its present form is unsustainable.

The term PAYGO is used for the lay person; cute semantics – but misleading at best, willfully dishonest at worst. It mischaracterizes the program for the political purpose of allowing politicians to declare that Social Security does not contribute to the deficit, and therefore, should not be overhauled in any major way. But until we agree to start recording Social Security (and Medicare) in budgets in actuarially sound way, we will never be able to honestly and effectively deal with their fiscal crises.

How we talk about and understand Social Security and its funds needs acute attention because we face another looming crisis of funding: Social Security’s Disability Insurance (SSDI). SSDI benefits are slated to be cut by 20 percent near the end of 2016, at the same time that SSDI has seen a massive increase of recipients in the last few years. This is certain to be a major issue for the Presidential elections.

Already the Democrats are stirring up the base on this issue. Last week, Sen. Elizabeth Warren claimed that “The GOP is inventing a Social Security crisis that will threaten benefits for millions & put our most vulnerable at risk”. Obviously this is patently false. The entire Social Security program needs massive reform instead of incrementally kicking the can further down the road to avoid making difficult, but necessary changes for the long haul.