Here’s what could force a Social Security overhaul — and soon

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A surprise slowdown in Medicare spending has eased pressure to cut benefits in one of the government’s costliest programs. But a looming shortfall in another entitlement program could trigger big changes in the nation’s social-safety net as soon as two years from now.

The Social Security Disability Insurance program, which helps support 11 million Americans, will run short of money in 2016, according to the latest annual report on Medicare and Social Security. Tax proceeds dedicated to funding DI, as it’s known, will still cover about 81% of the program’s costs, expected to be about $156 billion. But that will still leave a shortfall of about $30 billion per year starting in 2016.

There are ways legislators can come up with $30 billion per year. But that’s a big sum of money, even by Washington’s inflated standards, and if it doesn’t come from tax hikes, it will have to come from painful cuts in something else. Since the modus operandi in Congress these days is to address major problems through last-minute showdowns that threaten fiscal calamity, the disability cliff (as it’s sure to become known) could lead to the biggest fight over entitlement programs in years.

A spike in recipients

Disability insurance was tacked on to Social Security in 1956, and it now accounts for about 19% of Social Security beneficiaries and 17% of spending. Since 2007 — when a grueling recession began — applications for DI have risen by 21%, while the number of people receiving awards has grown by 26%. That’s typical, since more people seek government disability payments when unemployment spikes.

Some critics argue the DI program is rife with fraud and amounts to welfare for some people who ought to be able to work. Yet the government rejects nearly two-thirds of the people who apply for disability, a portion that has gone up since 2007. And there are other reasons the feds have been paying out more in disability, such as an aging workforce more prone to injury and a one-year increase in the official  retirement age. Plus, to receive disability payments, workers must have paid into the system during the years prior to applying.

One option for filling the $30 billion gap in 2016 is to simply divert money from the regular Social Security trust fund, which is projected to take in about $860 billion in 2016 while paying out $800 billion, for a $60 billion surplus. But you try touching that money. Powerful lobbying groups such as AARP aggressively protect funds set aside for retirees, and besides, the trust fund that backs up Social Security pension payments will be exhausted by 2034 — or sooner, if that money goes to something else.

Congress could raise taxes to cover the DI shortfall, but anti-tax House Republicans seem unlikely to go along with that, and by 2016 the Senate could be in Republican hands as well. Another option is to simply leave the gap intact and reduce disability payments to keep them in line with funding. This year’s expiration of extended unemployment benefits was a precedent of sorts for such a move.

A thorough overhaul

At some point, however, Congress is going to have to undertake a thorough overhaul of both Medicare and Social Security, since both programs promise benefits far beyond what current tax levels will support. Waiting till the last minute would put that deadline at 2030 or so, which is when Medicare will start to run dry.

But the pressure to act will intensify long before that, and the DI shortfall in 2016 will force Congress to either come up with a rickety piecemeal fix or find a more comprehensive solution. Congress is now stuck trying to find $11 billion to replenish the nearly empty Highway Trust Fund — generally considered “good” government spending, since it finances infrastructure that benefits everybody — which shows how tough it will be to find $30 billion per year to keep disability payments at expected levels.

If there’s any good news, it’s that there’s bipartisan agreement on the need to overhaul entitlement programs, and the sooner the better. The disagreement is over how. Democrats favor higher taxes, especially on the wealthy, while Republicans prefer private-sector solutions that entail cutbacks in benefits and more risk for beneficiaries. Up till now, there’s been enough wiggle room to avoid tough decisions. But Congress can’t wiggle for much longer.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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