If you're a current recipient of Social Security Disability (SSD) or Supplemental Security Income (SSI) benefits, you may have heard news reports predicting an up to 20 percent involuntary reduction in benefits beginning in late 2016. This date is when the SSD trust fund is calculated to become insolvent, and recipients will have no "emergency fund" of benefits, relying only on what is withheld through payroll taxes. If another recession hits, benefits could be cut even further as wages (and FICA taxes) fall. How did this problem develop, and is there anything you can do to preserve your current benefits? Read on to learn more about this problem and how you may want to seek legal advice.
Why is the Social Security Disability fund insolvent?
Social Security retirement payments, SSD, SSI, and Medicare are each funded through a complex tax formula. Although FICA taxes are usually taken out of your paycheck in one lump sum, this tax revenue is apportioned to several different trust funds, each supporting a different program. Because the SSD fund has paid out more in SSD and SSI benefits than it has taken in (according to the federal government's funding formula), it has overspent to the point that there is almost no cushion left. Once this fund runs dry, the government will only be able to pay out what it receives, as it receives it.
Because Social Security retirement and death benefits are paid from a different fund, this will have no impact on retirement benefits, nor will it impact Medicaid coverage. However, for the millions currently receiving SSD or SSI benefits, a 20 percent pay cut can have a huge impact.
What are the proposals to fix this problem?
There are several options being bandied about, although lawmakers have not come to a clear consensus yet. Because the funds are set to run out during an election year, and each party has strong opinions on the continued existence of these programs, this is likely to become a contentious and hot-button issue.
One short-term fix is simply to borrow the funds from the Social Security retirement fund or Medicaid fund until a permanent solution is decided. However, this fund is having its own own solvency problems, and unless there's a fundamental shift in the amount of inflow and outflow, the SSD fund will again run dry in a few years.
A longer-term option is to restructure the way benefits are granted, and strengthen efforts at fraud reduction. By removing disability recipients from the rolls when they are no longer (or never were) disabled, government officials can ensure that there are adequate funds for those who are truly unable to work.
A final option, albeit an unpopular one during election season, is to raise taxes or restructure the amount of tax revenue apportioned to the SSD fund. By diverting some funds from Social Security retirement or Medicaid, the SSD fund may become solvent.
What will happen if benefits are cut?
You may want to seek legal advice to determine whether there are other options that can help you preserve your benefits -- like filing for early retirement and converting your SSD benefits to retirement benefits. Although you'll receive a lower monthly amount by converting early than you would if you had waited until full retirement age to file, the fund that disburses Social Security retirement benefits is more solvent than the one that provides SSD benefits, and this conversion can allow you to better plan your financial future.
A social security disability attorney will also be able to evaluate whether you qualify for any other public assistance programs, and help you with the application process if necessary. Often, by taking advantage of other benefits to which you may be entitled, you'll be able to make up any cut in SSD benefits that may be coming your way.