Wednesday, September 30, 2015

One Year to Insolvency

The image I cannot get out of my head while writing this is the quartet playing calmly on deck as the Titanic slowly sinks into the sea.?

The National Journal reported in July that a hand full of elected officials is contemplating what to do with Social Security disability heading for a "2016 Cliff." According to the Social Security and Medicare Boards of Trustees, the disability trust fund now faces an "urgent threat of reserve depletion." In short, it is one year from insolvency. 

As background, Just Facts says that "In 1935, Congress passed and Democratic President Franklin D. Roosevelt signed into law the 'Social Security Act.' This law created 'a system of Federal old-age benefits' for workers and their families. In 1956, the law was amended to also provide disability benefits." (citations omitted). There are two programs referred to as "Social Security," the "old age" program and the "disability" program. The current crisis regards disability, but it appears that it may be a harbinger of things to come in the old age arena. 

The "cliff" is a subject I have written on before. In June 2014, I wrote the First Social Program Bankruptcy is Upon Us. In August this year, I found some news stories about over payments in Social Security Disability interesting in Time for that Bake Sale? We may see it as fortunate that the National Journal is writing about this subject, they certainly have a larger footprint than this blog. We might also be disappointed that it is only the National Journal. There has been little coverage of this in the rest of the news media?

I found a blog on the Center on Budget and Policy Priorities. There was also a recent piece on CNBC. Finally Yahoo news had some coverage. A story that may very soon affect about 10 million Americans (disability) and could soon affect us all (old age) is drawing very little attention as yet. 

There are proposals for reforms in the disability program. According to The National Journal, James Lankford of Oklahoma will reintroduce "the Coburn bill" from last year. This would reform the "administrative review process" change "how attorneys are paid" and impose "new rules for judges" in Social Security Disability (SSD) cases. There is also discussion of "a work-incentive program" described as changing the effect of part-time employment for those receiving benefits. 

The National Journal reports that there are already several bills pending in the House. One of these would "prevent people from receiving disability and unemployment insurance at the same time, tighten rules for who can provide medical evidence for disability determinations, and increases penalties for fraud." Some anticipate that various existing proposals will be consolidated into a single bill. 

The Journal reports that "Congress hopes to pass" legislation that will make reforms and add funding "to avoid a catastrophic 20-percent cut for those who receive disability insurance." The reduction would occur otherwise, because the payments for disability under Social Security come from a trust fund separate from the retirement trust fund. 

The blog on the Center on Budget and Policy Priorities says that the solution to this "cliff" is simple. It advocates doing away with the separate trust fund now. This would allow the full disability benefit payments to be made, without all of the debate about reform. The system could simply proceed as is, and the crisis is averted. A simple and elegant solution. 

According to the National Journal, this is the approach in a bill recently released by "House Democrats," and supported by "the White House and other outside groups." This is referred to as a "clean reallocation, without any strings attached." One interest group, the American Association of Retired Persons (AARP) reportedly agrees with a loan from one trust fund to the other, but opposes combining the two funds. 

Similarly, the Social Security and Medicare Boards of Trustees says that the solvency problem is not isolated to the disability program. Their report says that "Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing." You see, the disability program is insolvent in 2016, but some predict the entire Social Security program is insolvent as early as 2037. 

The simple and elegant solution of just combining the bankrupt Disability Fund with the soon to be bankrupt general trust fund will do nothing more than speed the depletion of the general trust fund. It is as if there is a group in a boat that is slowly sinking. The boat is taking on water. There is another, larger, boat nearby which is also sinking but not as quickly. The simple solution is to evacuate the smaller boat, but that adds to the problem of the larger boat and speeds its sinking. The simple solution does nothing to save the smaller boat, it just defers the problem for another day.  

The Social Security and Medicare Boards of Trustees says that instead, "Lawmakers should take action sooner rather than later to address these structural shortfalls, so that the uncertainty now facing disability beneficiaries will not eventually be experienced by other programs’ participants." In other words, deal with the problems with the disability trust fund now, instead of merely putting this off for another day. In other words, they advocate fixing the smaller boat rather than abandoning it. 

What happens if Social Security Disability cannot pay? That is if the little boat sinks? According to the National Journal, the disability trust fund "covers 10 million Americans." That fund "will be unable to pay its full benefits starting in late 2016." If something is not done (that something has to be either less money paid out or more money paid in), then the Journal says there would have to be a "20-percent cut in 2016."

What does that mean in real terms for those receiving the disability benefits? According to Yahoo news, "the average monthly benefit for disabled workers and their families is $1,017." So, if the 20% cut occurs, the average disability benefit recipient would "would see a reduction of $193 a month," to about $824. 

In the debate between higher taxes (more finds paid in) and reform (less paid out), the Journal notes that reform alone cannot prevent the 20% cuts. It notes that "even if Congress agrees on these reforms," the effects of those reforms would be in the future, not in the near-term." As such, those "future savings" would not have the immediate effect necessary to make the disability fund solvent in the near-term.

The National Journal says that legislation will face "two tests." First, "does it do enough to convince Republicans to support reallocating money and can it attract any Democratic support?" The debate is not new. Neither of the Social Security programs is projected to be solvent long-term. The volume of payments out of the programs is simply disproportionate to the volume of income for the programs. Stated simply, the taxes imposed at this time are not sufficient to support the promised payments. 

For some reason, this simple math is rarely discussed. Will the benefits be decreased or will the taxes be increased? This is currently a disability debate, but in 20 years it will be an old age debate if the current course is not changed. If the retirement program is a lender in 2016, or if the two funds are combined for expedience in 2016, the day of reckoning for the retirement program may come sooner than 20 years. 

Will the government that created these insolvent programs fix the incongruity now, or will there be some stop-gap solution now to push this incongruity into the future for someone else to solve? There will be a great deal of debate at some point, but for now the media is quiet on this interesting conundrum of promises made but not funded. For now it is blogs and Internet providers asking the hard questions. 

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