New brief on Social Security Disability Insurance finds temporary reallocation of Social Security existing payroll tax rate could strengthen the DI trust fund before its reserves are depleted.
Disability Insurance - (Also referred to as DI or disability-income insurance) - An insurance policy that pays disability benefit as a partial replacement of income lost due to illness or injury. Most disability insurance policies pay a fixed sum for a fixed period, while others pay a monthly sum for the entire period the insured is disabled from earning suitable income. Employees who've paid the Federal Insurance Contributions Act (FICA) tax for a certain amount of time, are eligible to receive the Social Security disability income insurance.
Workers and employers pay for disability protection through their Social Security taxes. Of the 6.2% of earnings that workers and employers each pay for Social Security, 5.3% goes to the Old-Age and Survivors Insurance (OASI) trust fund, and the remaining 0.9% goes to the Disability Insurance trust fund. The two trust funds are often considered together as the OASDI, or Social Security, trust funds, but by law they are separate.
The Disability Insurance trust fund's reserves are projected to be depleted in 2016, after which tax revenues coming into DI would cover only about 80% of scheduled benefits. Congress has never permitted such a drop in Social Security benefits to occur, and lawmakers will need to take timely action to ensure that current benefits continue for disabled workers and their families.
A temporary reallocation of part of Social Security's 6.2% tax rate from the OASI trust fund to the Disability Insurance trust fund would ensure that both funds can pay full benefits until 2033. After that, in the absence of further action by Congress in the meantime, scheduled taxes would cover about 75% of scheduled benefits.
Congress has reallocated the Social Security tax rate 11 times in the past, traditionally without controversy. "Reallocation is a straightforward process and the need for it does not come as a surprise," said Virginia P. Reno , NASI Vice President for Income Security Policy and co-author of the new brief, Social Security Disability Insurance: Action Needed to Address Finances. "After Congress last reallocated Social Security's tax rates, in 1994, the program's trustees projected that the DI trust fund would be solvent through 2016. That projection has proved remarkably accurate."
DI has been part of the Social Security program since the 1950s, and provides insurance against loss of earnings due to the onset of a significant work incapacity. Currently, 8.8 million disabled workers receive Disability Insurance benefits. Although benefits are modest - an average of $1,130 a month in January 2013 - disabled workers and their families rely heavily on DI benefits. Nearly half of beneficiaries (46%) rely on DI benefits for 90% for more of their total income. Most people receiving DI benefits are in their 50s or early 60s, and many have life-threatening conditions. Disability Insurance benefits are a critical lifeline for disabled workers and their families.
The National Academy of Social Insurance is a nonprofit, nonpartisan organization made up of the nation's leading experts on Social Security, Medicare and other social insurance programs.
Download the brief from www.nasi.org/sites/default/files/research/SS_Brief_041.pdf