Social Security trustees report shows modest improvement in financial outlook

The big news in the Social Security trustees report released yesterday is that the Social Security Disability Insurance (SSDI) trust fund depletion date was extended 20 years, to 2052. Recent declines in SSDI applications and in assumed SSDI take-up going forward contribute to a small improvement in Social Security’s overall financial status, as did higher-than-projected mortality in recent years.

Other demographic factors—recent and projected declines in the birth rate and immigration—had negative effects on the program’s finances, though not enough to offset higher-than-expected mortality. However, when combined with the “valuation period” effect—the retirement of the large Baby Boomer cohort and subsequent slowdown in the growth rate of the working-age population—the demographic factors are essentially a wash—reducing the projected long-term deficit by .01 percent of payroll.

Economic factors included both positive and negative factors, but on balance increased the projected deficit by .04 percent of payroll. The positive factors include lower expected inflation, slightly higher long-term wage growth, and the current strong economy as a starting point for projections. The negative factors were lower productivity growth and interest rate assumptions. With the aforementioned positive effect of changes to disability experience and assumptions, which reduced the projected deficit by .07 percent of payroll, and minor technical adjustments, the overall effect was to shrink the projected deficit by .06 percent of payroll over the 75-year window.

Is this good news? Yes, in the sense that the annual release of the report often serves as an excuse for fearmongering. It’s more challenging to put a doom-and-gloom spin on an improved financial outlook—though some will inevitably try. One possible news hook is the fact that the combined “old age” and “disability” trust funds (often simply referred to as “the [combined] trust fund”) will start to shrink this year as more Baby Boomers retire. This is entirely proper and predictable—the Baby Boomers are the reason we built up the trust fund in the first place—but it has never stopped anyone from yelling “Social Security is going bankrupt!” in a crowded theater of bad ideas. (The challenge for the doomsayers, rather, is that they’ve been saying this ever since Social Security revenues minus the interest on trust fund assets weren’t enough to cover benefit payments, so this talking point has become a bit dull with time.)

What will happen if the trust fund is exhausted in 2035, as projected? Social Security is mostly a pay-as-you-go program, so current revenues will still be sufficient to cover 80 percent of promised benefits. While allowing a 20 percent cut in benefits would constitute terrible negligence on the part of Congress, the system would survive, and beneficiaries would still be better off than under some “reform” proposals that would preemptively cut benefits more than would occur automatically if nothing were done to shore up the system’s finances. While momentum is growing to shore up the program and expand benefits through increased revenues, so far this is not a bipartisan movement.

The new report may make life easier for disability advocates, who’ve contended with years of alarmist news stories by reporters who troop to poor rural areas to find beleaguered families with multiple SSDI recipients—and issues. These stories conjure up images of a growing underclass relying on SSDI as a substitute for lost earnings or unemployment benefits. More sober analysis revealed that the growth in disability rolls from the mid-1980s through 2012 could be explained by population growth, aging Baby Boomers, women’s entry into the workforce, the increase in Social Security’s normal retirement age from 65 to 66 (when SSDI beneficiaries start receiving old age benefits instead), and adverse economic conditions. The decline in the disability rolls since 2013 is somewhat harder to explain, though Baby Boomers aging out of disability benefits at age 66 and a strong economy are contributing factors.

The fact that disability take-up tends to correlate with unemployment seems to support the idea that disability benefits are used as an improper substitute for unemployment benefits. The facts tell another story. While applications increase when economic conditions worsen, so do denials, and there’s little evidence that it becomes easier to access benefits during recessions. Instead, the increase in take-up reflects the fact that employers are more likely to lay off workers when business is bad, and some of these workers, though previously employed, will meet SSDI’s strict eligibility standards. (Consider, for example, a small business that keeps on a relative or longstanding employee in poor health until the survival of the business is threatened.)

If anything, it appears that accessing disability benefits may have become harder in recent years, though no one knows exactly why or how. This, in turn, may have contributed to a plunge in applications, as would-be applicants are discouraged before even trying. Possible factors contributing to the drop in beneficiary rolls include the closing of some regional Social Security offices, long processing times, and increased pressure on Administrative Law Judges to deny claims (which may also influence the composition of the ALJ workforce). On a more positive note, people with serious health conditions and other sources of income who in the past might have applied for SSDI benefits primarily as a way to access Medicare benefits (which SSDI beneficiaries become eligible for after two years) may no longer need to do so thanks to the Affordable Care Act. Another possible factor, welcomed by advocates, is increased funding for reevaluations and other “program integrity” measures.

In short, while it’s good news that Social Security’s financial outlook is brightening, some contributing factors, including higher-than-expected mortality, aren’t a cause for celebration. It remains to be seen whether the drop in SSDI take-up reflects positive trends, such as improved access to health care, or negative factors—eligible applicants being dissuaded or turned down.

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