February 8, 2013

Federal Disability Insurance (DI) is going broke, fast. That much is clear based on annual reports from the Social Security Trustees’ annual reports, as discussed earlier. While this forum is not about disability insurance per se (or Social Security or Medicare), the rapid increase in DI payouts and other mandatory programs point to the fiscal problems the nation faces in the coming years – and in turn this places continued pressure on federal and military pay and pensions.

What is surprising is how fast DI and similar programs are going broke. This is clear in looking through the numbers in the Congressional Budget Office’s (CBO’s) “Budget and Economic Outlook: Fiscal Years 2013 to 2023,” released Wednesday.

Recall that in 2011, DI took in just over $106 billion, but paid out over $132 billion – a difference of $26 billion. That $26 billion came out of DI assets, drawing them down from $180 billion to $153 billion in one year.

As recently as 2008 DI broke even, bringing in $109.8 billion, but paying out $109 billion. DI that year had assets of $214.9 billion.

The CBO’s most recent report projected that DI payouts will continue to grow over the next 10 years. In 2012, the payouts rose to $136 billion, and this year they are projected to rise again to $142 billion. Then $148 billion in 2014, $155 billion in 2015, and $161 billion in 2016. The rapid increase in DI projections over the coming years mean that the DI will go broke by 2016.

DI is a small portion of Social Security – by 2017, Social Security as a whole (including DI) is projected to pay out over $1 trillion, an increase from $768 billion in 2012. And outlays will continue to grow each year thereafter. Separately, health care programs are projected to grow from $825 billion in 2012 to $1.246 trillion in 2017.

By 2023, Social Security outlays are projected to be $1.423 trillion, and health care outlays will be another $1.845 trillion, for a total of $3.268 trillion in these two programs alone. (In 2012, the total budget for the U.S. government was just over $3.5 trillion. Social Security and health care will take up almost this entire amount within ten years.)

The Wall Street Journal’s Gerald Seib highlighted on Wednesday how the unrelenting increase in spending on entitlements is actually taking place as the size of government – as measured by the number of workers – has been shrinking. He writes that “[w]hile the debate rages over the size of government, a funny thing has happened: The number of government workers has been shrinking, even as spending on entitlements increases.”

The rise in entitlement spending – with DI payouts being but one component – coupled with continued stimulus spending has led to four straight years of $1 trillion+ deficits. These huge deficits in turn have led to Congressional and White House scrutiny of federal and military pay and benefits. This in turn has led to the freeze in pay and tweaks to federal pensions. But because deficits continue to remain at high levels in relation to the GDP, benefits such as pensions will continue to be a target for reform.

These forces highlight how fiscal realities will drive further reform of federal and military benefits such as pensions, which points to the importance of building independent sources of incomeindependent wealth – via the TSP and other investment vehicles for greater security in what will continue to be trying times.

Related topics: longevity