2016 was setting up to be a critical year for Social Security. According to its most recent Trustees' Report, by the end of 2016, the Social Security Disability Insurance Trust Fund was expected to run out of money, slashing disability benefits checks to around 81% of their previous levels.
As part of the recent budget deal, however, Congress repeated an adjustment it has used in the past, temporarily shifting tax revenue from Social Security's retirement program to keep the Disability program fully operational. In 2016, 2017, 2018, Social Security Disability will be receiving a larger share of the overall Social Security tax. 2.37 percentage points of payroll vs. 1.8 percentage points normally.
A bandage -- but not a long term fix
The adjustment essentially robs Peter to pay Paul. It shores up the Social Security Disability Trust Fund while increasing the pressure on the Social Security Retirement Trust Fund by reducing the tax revenue to the latter. The retirement fund itself is anticipated to run out of cash by 2035. The increased pressure to the retirement program from shifting money to the disability program might shift that date a bit earlier, as the date of the combined funds' exhaustion is anticipated to take place in 2034.
Still, that day of reckoning continues to approach. At some point in the future, Congress will either need to agree on an approach to do something to shore up the program on a more permanent basis. Otherwise the cuts that will happen by default when the combined Trust Funds empty will make the averted 2016 crisis look small by comparison. The list below shows several of the more likely potential outcomes:
1. Continue to kick the can down the road without a longer term fix: Considered separately from the Disability Trust Fund, The Social Security Retirement Trust Fund is projected to be capable of sustaining itself until 2035. Those same projections indicate that making more of the same adjustments to move funds to the disability side of the ledger would only knock one year off of the remaining lifespan of that fund. While that option may seem attractive to lawmakers in the short term, the problem with it is that the longer it takes to put a comprehensive fix in place for Social Security, the more expensive it will be.
2. Shift money from the General Fund: In 2010, Congress passed a temporary cut on the employees' part of Social Security tax contributions. The money that otherwise would have been lost to the Social Security Trust Fund from that temporary tax cut was made up by shifting money from the government's General Fund. A similar shift of money from the General Fund could allow benefits to continue without a cut or an explicit tax hike, but it would come at the cost of a higher general deficit .
3. Cut benefits: According to the Social Security Trustees' report, a 16.4% across the board cut to Social Security benefits would keep the program solvent for the next 75 years . As harsh as that sounds, understand that if nothing is done, total benefits will need to be cut by 21% if the combined trust funds run dry.
4. Raise Social Security taxes: The same Trustees' report indicates that increasing the payroll tax to 15.02% of covered payroll from the current 12.4% would also likely keep the program solvent for the next 75 years. Of course, raising payroll taxes at a time of soft wage growth may not sit well with employees trying to make ends meet with minimal raises or employers looking to hold down compensation expenses.
5. Do nothing:If lawmakers don't act on a more permanent fix, their ability to kick the can down the road ends some time around 2034, at which point the combined Trust Funds are expected to be empty. Around that time, benefits will be cut by 21%, with the reductions eventually reaching 27%.
None of those likely potential outcomes is a magic bullet that solves Social Security's problems without causing pain somewhere in the system. Chances are that Congress will do something when the temporary fix to Social Security Disability ends after 2018 -- even if it just is to continue to kick the can down the road. Still, whatever it does won't be a miracle cure.
What can you do about it?
If nothing else, the near term risks to Social Security Disability should spur you to action on your own. Disability is a serious risk, with around one in four of us likely to face it before retirement age. Additionally, note that even without the risks to its funding, the Social Security Disability program only pays an average of $1,164.94 per month to a disabled person. As a result, regardless of whether Congress acts to more permanently patch Social Security's disability program, you should strongly consider other ways to protect yourself from the risks of disability.
Disability insurance is frequently available as an employee benefit through work, and it can often be purchased through an insurance agent if not available through work. Like most insurance, though, the time to buy it is before you need it, as it will likely be impossible or prohibitively expensive to get it if you're already disabled.
In addition to insurance, be sure to have a decently stocked emergency fund, just in case. Social Security Disability requires you to be disabled for at least five months before receiving payments, and many private insurance policies also have waiting periods.
You may never wind up disabled, but if you do, you'll be incredibly glad you have those protections in place. They won't ease the physical pain of your disability, but they will help relieve the financial suffering. And that should help better enable you to focus on managing through the disability as best you can.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.