off the charts
BEYOND THE NUMBERS
BEYOND THE NUMBERS
Congress Needs to Boost Disability Insurance Share of Payroll Tax
July 17, 2014 at 2:29 PM
Congress should increase the share of the Social Security payroll tax that’s devoted to Disability Insurance (DI) and reduce the share allocated to Old-Age and Survivors Insurance (OASI). We explain in a new paper why that’s essential to avoid a 20 percent across-the-board cut in DI benefits in 2016, how Congress has reallocated payroll tax revenues many times in the past, and that reallocation has not been controversial.
The current Social Security tax is 6.2 percent of wages up to $117,000 in 2014, which both employers and employees pay. Of this total, 5.3 percent of covered wages goes to the OASI trust fund, and 0.9 percent goes to the DI trust fund.
Traditionally, lawmakers have divided the total payroll tax between OASI and DI according to the programs’ respective needs. Congress has reallocated payroll tax revenues many times — sometimes from OASI to DI, sometimes in the other direction — to maintain the necessary balance.
The current allocation reflects policymakers’ decision in 1994, when they last reallocated taxes between the programs. The 1994 reallocations only partly mitigated the effects of the 1983 Social Security amendments, which slightly raised DI’s cost and cut DI’s share of the payroll tax.
Lawmakers expected that the 1994 reallocations would keep DI solvent until 2016. Despite fluctuations in the meantime, current projections still anticipate that the trust fund will be depleted in 2016 as forecast.
DI’s anticipated trust fund depletion does not indicate that the program is out of control or that it’s “bankrupt;” that is, if the trust fund were depleted and policymakers took no action, the program could still pay about 80 percent of benefits. But, at the same time, cutting benefits by one-fifth for an extremely vulnerable group of severely disabled Americans is unacceptable.
Ideally, Congress would address DI’s finances in the context of legislation to restore overall Social Security solvency, as we’ve previously pointed out. But even if policymakers make progress toward a well-rounded solvency package before late 2016, which seems unlikely, any changes in DI benefits or eligibility would surely phase in gradually and hence do little to replenish the DI fund by 2016. Consequently, reallocating payroll tax revenues between the two programs would still be necessary.
There is nothing novel or controversial in such a step, and failing to take it would be irresponsible.