The trust fund that helps pay for disability insurance under Social Security is on track to run out of money next year, a shortfall that would trigger a 19 percent cut in benefits. To avert these painful cuts, policymakers should overhaul the program by dropping the progressive benefit structure and replacing it with a flat benefit that will keep recipients out of poverty.
This change would put the program on a path to long-run solvency and lift more than 1 million disabled individuals out of poverty — all without raising taxes.
Coupled with other necessary reforms — such as rational eligibility requirements and determination procedures — a flat benefit would actually pave the way for a payroll tax cut.
The disability insurance program was established as a social safety net, designed to prevent disabled workers from falling into poverty. But it has morphed into an income replacement program. Under the current benefit structure, workers with the lowest earnings (and often the fewest resources) receive the lowest benefits — less than a third of what those who had the highest earnings can receive. As a result, about 20 percent of disability insurance beneficiaries — roughly 2 million people — live in poverty.
Replacing the benefit formula with a flat, anti-poverty benefit for all future beneficiaries would reduce program costs by $168 billion over the next 10 years. This would cover two-thirds of the program’s projected $256 billion shortfall. As the share of disabled individuals receiving a flat benefit rises over time, so too will the savings to the taxpayer. In the long run, a flat benefit could eliminate the disability insurance shortfall entirely and generate a large enough fiscal cushion to reduce the disability insurance payroll tax.
Nothing would change for current beneficiaries. Anyone already receiving a monthly disability income check would continue to receive the same amount. New beneficiaries, however, would receive a flat benefit designed to keep them above the poverty line — $981 per month in 2015.
Compared with the average disabled worker benefit of $1,165 today, a flat anti-poverty benefit would mean higher disability income benefits for about 35 percent of future beneficiaries and lower benefits for about 65 percent.
Based on the current 1.8 percentage point disability insurance payroll tax, a flat benefit would make the program even more progressive because higher contributions would no longer lead to higher potential benefits. Pairing a flat benefit with a flatter payroll tax — by reducing the payroll tax cap — would bring disability insurance contributions closer in line with benefits.
A flat, anti-poverty benefit would also clarify the purpose of disability insurance as a poverty prevention program. Those seeking an income replacement program can readily find one at their nearest insurance broker’s office. Private disability insurance typically provides benefits equal to about 60 percent of pre-disability income. For anyone making more than about $20,000, that’s a better benefit than what Social Security’s disability income provides.
Most workers have no idea how much they would receive in benefits if they became disabled. If they did know, almost all would say that it’s not enough. Yet only about one-third of all workers have private disability insurance coverage.
A flat benefit would eliminate the guessing game and help most workers realize that disability insurance alone won’t give them the level of income replacement they need or want. Greater private disability insurance exists to fill the gap without tapping into Social Security’s resources.
At an average cost of $25 per month, private disability insurance is relatively cheap (a worker who makes $50,000 pays three times that amount — $75 per month — in disability insurance taxes). A flat benefit along with other reforms to improve the efficiency and integrity of the disability insurance program could generate enough savings to reduce the payroll tax rate and free up income that individuals could use to purchase private disability insurance.
The disability insurance program is complicated, and reforming it will not be easy. But a flat, anti-poverty benefit is not a heavy lift. A flat benefit would reduce poverty among the disabled, put the disability insurance program on firmer financial footing and pave the way for a payroll tax cut.