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Social Security Disability Fund on Life Support in 2 Years

NEW YORK (MainStreet) -- For current and future retirees, the news regarding Social Security benefits is no better -- and no worse -- than it has been. The latest Trustees report is substantially unchanged from last year's, with a projected depletion of trust fund reserves still projected for 2033. After that, payroll tax revenue would only allow payment of about 75% of scheduled benefits through 2088.

However, the most imminent challenge is faced by Social Security's Disability Insurance (DI) benefits. Over 10 million people received disability benefits in 2012, with an average payment of $1,134 per month to a typical recipient 53 years old.

"While legislation is needed to address all of Social Security's financial imbalances, the need has become most urgent with respect to the program's disability insurance component," the Trustees report summary says. "Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016."

Disability benefits have unexpectedly risen because of higher disability rates at younger ages and because of the impact of the recession, according to an analysis by Alicia Munnell, director of the Center for Retirement Research at Boston College.

With the disability insurance trust fund facing depletion in 2016, benefits would need to be reduced by 20% to correspond with payroll tax revenues. Munnell says Congress is not likely to allow that to happen.

"In 1994, the last time the program was about to run out of money, Congress reallocated 0.6 percentage points of the payroll tax from the OASI (Old-Age and Survivors Insurance) program to the DI program," she writes. "Congress is likely to reallocate payroll tax revenues this time as well."

Social Security and Medicare combined accounted for 41% of Federal expenditures last year. And while Social Security faces a long-term financing deficit that equals 1% of the nation's gross domestic product (GDP), Munnell says the budgetary shortfall is manageable.

"The changes required to fix the system are well within the bounds of fluctuations in spending on other programs," she says. "For example, defense outlays went down by 2.2% of GDP between 1990 and 2000 and up by 1.8% of GDP between 2000 and 2010."

-- Written by Hal M. Bundrick for MainStreet

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