by JoeTheEconomist
April 26, 2013 6:59 AM
Social Security consists of two programs. One is old-age and survivors insurance (OAS) and the other is the disability insurance (DI). While these programs are legally distinct and separate, Social Security OAS is not completely independent of the DI system because both systems draw on the same tax base for support. They inherently compete against each other for resources.
The DI system according to the Trustees 2012 is projected to reach insolvency in 2016. At that time, Congress will have one of three choices. It will be able to pull payroll taxes away from OAS to fund the shortfall. It can pull general taxes away from debt control. Or, it will have to redefine the benefit levels of the DI program. It is unreasonable to believe that OAS will not be part of this discussion.
If we perserve the 15.3% payroll tax, it is possible to shift the percentages such that DI gets a larger portion of the revenue directly taking money from the OAS program. This is the assumption built into the Trustee's projection that the combined trust-funds will be exhausted in 2033. The Trustee's projections use the OAS trust-fund to cover-up the shortfalls in DI. If we consider the OAS without support for the DI, the Trustees project that full benefits would last until 2035.
It is possible to increase the payroll tax rate from 15.3%, but that tax revenue that cannot be raised for the OAS system. Increasing payroll tax rates for DI, means that it will be harder to raise them for OAS or medicare. It is possible that we could provide a subsidy from the general tax payer, like the EITC, which is an offset for the high cost of payroll taxes. Such a change would come at the expense of not controlling the debt. It is possible to lift the cap making more of the wages subject to taxes, but against this revenue could have been raised as an income tax to control the debt.
In all likelihood, the issue of DI's financial imbalances will trigger a national discussion about taxes and how to deploy new tax revenue. If we raise taxes, the voters will set the priority for that revenue. The priority might be DI. It might be OAS. It might be lowering the debt. It might be something else.
Here is NPR aritcle on the problems in DI, and it is a reminder that Social Security does not operate in a vacuum.
