Social Security: OASI and DI

A brief response to a comment from yesterday’s post. When CBO projects the point at which the Social Security trust fund will be “exhausted” that means there are no more securities to redeem to pay benefits that are now greater than payroll taxes flowing into Social Security, and under current law when this occurs benefits must equal taxes flowing in. Thus,  if we do absolutely nothing, there will be an ~ 25% benefit cut in about 20 years (shown as 2033 in table below, 3rd column OASDI, last row). As an aside, while this would be a big cut, it also means that people saying “Social Security won’t be there at all when you retire” don’t understand the program’s finances. I don’t suggest doing nothing and allowing such a cut, but ~75% of benefits is a lot greater than 0% of benefits, obviously.

However, something must be done to Social Security (2012 Trustees report from which above table taken) within the next few years, because the trust fund that back stops the Disability Insurance portion of the program will be exhausted in 2016 (DI column above, last row). Again, this doesn’t mean there will be nothing, but there will occur an automatic benefit cut within the next few years sans action. When CBO provides a date of 2033 for OASDI trust fund exhaustion, they are assuming that Congress and the President will pass a law that will allow the co-mingling of the OASI (old age, survivor) with the DI (disability) trust funds, thus allowing Disability benefits to not be cut around 2016. It has long been assumed they would act in this way, but it is my understanding that it will take legislative action for this to occur.

cross posted at samefacts

Social Security disability, rewind

The 2012 Social Security Trustees report estimates the year at which benefits will outpace Social Security (OASDI) payroll tax receipts plus spending authority granted by IOUs (from when more payroll taxes flowed in than benefits were paid out), and the program will no longer able to pay full benefits as 2033.

However, under current law, the disability portion (DI) of Social Security and the old-age retirement portions (OASI) are separate and always have been. The date of 2033 reported in the media and shown below under OASDI, assumes that Congress will pass a law allowing the mingling of funds from the old age (OASI) and disability (DI) portions of Social Security to pay for the disability shortfall, that will come about in 2016.

As a stand alone program, the old age portion of Social Security can pay full benefits through 2035. Assuming the parts of the program are going to be co-mingled (which has always been assumed) puts the year when the combined program could no longer pay full benefits without changes at 2033. The shortfall facing the disability portion of Social Security is much smaller (stated as percent of taxable payroll [and not GDP], 0.37 v. 2.30) than is the one facing the old age retirement portion.

At some point, Congress will actually have to do some of these things that have always been assumed to be straightforward. I wrote nearly the same post about 11 months ago. Also, keep in mind that the long range financing of Medicare is set to move away from payroll taxes, and therefore trust fund accounting, and toward income taxes, by default.

PS: I apologize for the quality of tables. Taken from pdfs in a manner that usually has higher quality.

Social Security disability woes

Dylan Matthews underlines the need for reform of the Disability Insurance (DI) portion of Social Security, playing off of a story in today’s WSJ about high rates of approving disability claims. The summary of the 2011 Annual Social Security Trustees’ report provides a clear statement of the fact that the DI portion of Social Security faces a problem sooner than does the Old Age Survivor Income (OASI) portion of Social Security (p. 4).

The table above shows that the DI trust fund will be exhausted in 2018, as compared to 2038 for the OASI (retirement portion) portion of Social Security. Exhaustion of the trust fund means that the benefits paid out must equal the taxes flowing into that portion of Social Security, beginning in that year, if no changes are made. Starting in 2005, the disability claims paid by the DI portion of Social Security were greater than the taxes flowing into DI. Full disability benefits have been paid since 2005, and will continue to be paid so long as there are special issue Treasury bonds to be redeemed (that were purchased with surplus taxes flowing into the DI portion of Social Security since the 1980s). Once they are gone, either benefits will be cut, or Congress will have to provide another source of revenue.

Several points to highlight:

  • DI faces this ‘something must happen or benefits will drop’ date in 2018 as compared to 2038 for the OASI
  • OASI cannot cross subsidize DI under current law, but Congress could change this
  • The Trustees seem to assume that Congress will allow this cross-subsidization, because the OASDI trust fund exhaustion date (for both trust funds combined) is given as 2036

update: fixed a typo