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Disability and the U.S. budget deficit

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By Keith Forrest

Are your customers concerned about the future of the government’s Social Security Disability Insurance fund? Start a conversation using this information from our economic consultant, Keith Forrest. 

Yes! The two are related, as the Social Security Disability portion of the Old Age Security (OAS) “DI” trust fund is now in the RED on what would be defined as a “real world” cash flow basis. And, the shortfall must be borrowed by the Treasury in the credit markets as part of the growing budget deficit.

Very recently, the Office of Management and Budget (OMB), the White House budget arm, reported that the projected budget deficit for Fiscal Year 2009, which runs from October 1, 2008 through September 30, 2009, will increase geometrically to -$482 billion (up from a revised -$389 billion for the fiscal year ending on September 30, 2009). Key White House inputs include anticipated sluggish but still positive real GDP growth (on the order of 1.0-2.0% annualized over the next 18 months) and revenue shortfalls as a result of the recent fiscal stimulus.
 
My view: Leaving aside the upcoming national elections, we can almost say with near certainty that the projected red ink total of nearly a half trillion dollars will understate the real world budget deficit. How so? 
 
Very briefly, three quick items:
 
1. Only about one half year’s worth of funding for Iraq and Afghanistan is included in the budget projections.
 
2. Total Social Security outlays may increase by 7.5-9.0% next year versus the 6.5% projection by OMB. (Note: This will depend on next year’s cost-of-living adjustment, which I believe will more realistically be in the 5.0-6.0+% range, plus over 2 percentage points worth of growth due to a rise in the total number of beneficiaries. Through mathematical deduction, the White House projection for next year’s C.O.L.A. will be sub 4.5%. I believe this will be low.)
 
3. Total public sector borrowing as a result of the projected deficit will increase by upwards of 9-10%, while projected net interest expense is forecast to be lower next year. Such a discrepancy seems to defy mathematical formula.
 
At any rate, when all is said and done, what we’re calling the “real-world budget deficit” next year is much more apt to be closer to -$600 billion than the White House’s final projection before President Bush leaves office.
 
Now, how does disability fit into the picture? Key Social Security Disability facts include:
  • Over the last five years, there have been approximately three million total recipients added to the rolls of Social Security – and fully half of this growth has been in the disability component. This translates into a growth rate in the number of disabled workers of an excess of 4% per annum, or about four times that of the total U.S. population. Unsustainable!
     
  • However, at just 0.9% for both employers and employees, the DI payroll tax rate represents just 14.5% of the total Social Security FICA tax of 6.2%.
So, in recent years, half the new growth of all recipients within the entire Social Security program has been attributable to the disability component, while just 15% of taxes are expected to fund the same. It’s little wonder that the true cash flow situation of the DI component of the O.A.S.D.I. Trust Fund is in the RED.
 
Alternatively stated, since there are no real assets among the purported $200+ billion within the DI trust fund (just I.O.U.s from the operating side of the budget ledger), at present, the total 1.8% payroll tax (0.9% each for ERs and EEs) is insufficient to pay all DI benefits. This shortfall adds to the deficit, and therefore must be borrowed in the credit markets next year.
 
Implication: If/when Social Security is analyzed and brought into the 21st century in what will hopefully be the next presidential term, watch for key changes in either the outlay side of DI benefits and/or what is currently an insufficient payroll tax rate. 
 
Indeed, whether it’s Obama or McCain, “change” is, and must be, on the way!
 

Keith Forrest served as Vice President and Chief Economist with Union Mutual and Unum 1981-1999.  He previously was Senior Manager of Forecasting for American Airlines.  He now resides in State College, PA, and is an economic consultant and roving ambassador for Penn State University Women’s Athletics, the School of Music and the Pediatric Cancer Wing of Penn State’s Hershey Medical Center.