How about we quit nibbling at the edges of Social Security reform and try a plan that would not only help save the financially struggling program, which currently faces $13.4 trillion in unfunded liabilities, but improve benefits for the disabled. And we know this plan works because it’s been working in three Texas counties for nearly 35 years.
Social Security is actually three largely separate programs. First, it provides a small income stream for every senior who contributed the required 40 quarters to qualify. Second, there is a disability insurance provision that covers those who become disabled. And third, it has a survivorship provision that primarily helps children when an eligible working parent dies or a spouse who didn’t personally qualify for Social Security retirement benefits but was married to a deceased worker who did.
Disabled beneficiaries have grown almost 40 percent over a decade, to nearly 9 million. The Social Security trustees warn, “Lawmakers need to act soon to avoid automatic reductions [by 20 percent] in payments to DI beneficiaries in late 2016.”
Indeed, the problem is so bad a political scuffle has emerged over robbing from Social Security’s Old Age Trust Fund in order to pay disability benefits.
In 1981-2, three Texas counties (Galveston, Matagorda and Brazoria) opted out of Social Security and created an alternative, personally owned retirement program that mirrored all three of Social Security’s primary functions—only the benefits are better. It’s known as the Alternate Plan (AP).
Under the Alternate Plan county employees and their employer still pay the same as the FICA payroll tax, but a portion of it goes toward a private sector disability insurance policy.
In 1999 the Government Accountability Office compared disability benefits under the private sector Alternate Plan and Social Security’s disability insurance (SSDI) program. Under the Alternate Plan employees are immediately eligible to receive disability insurance; workers participating in Social Security and over the age of 30 must work 20 of the previous 40 quarters (i.e., five years) to be eligible for SSDI.
In addition, the GAO found that a low-income worker in 1999 would receive nearly twice as much under the Alternate Plan as under Social Security. And a higher-income worker would receive more than twice the SSDI amount.
The Alternate Plan’s disability benefit is based on the worker’s salary. Today, disabled workers receive between 66 percent and 80 percent of their monthly salary, up to a maximum of $8,000 a month, according to the Plan’s financial manager. Under SSDI, the large majority receive less than $1,700 a month, and only a handful receive more than $2,800.
In short, disabled people are much better off under the Alternate Plan. But so is the country because private sector companies would be monitoring those receiving benefits to ensure (1) they actually are disabled and (2) whether they have improved and can return to work—both sources of significant potential fraud.
The Alternate Plan also replaces Social Security’s survivorship provision with a private sector life insurance policy. If a worker dies, the family or estate is paid the proceeds, equal to four times the employee’s salary up to $215,000—a bit better than Social Security’s $255 death benefit.
Those in the Alternate Plan pay between 2.5 and 4 percentage points of their 12.4 percent FICA contribution for their private sector disability and life insurance (the specific amount can vary slightly from year to year based on the number of people on disability). The rest of their contribution goes to a professionally managed, personal retirement account that has always provided positive returns, even during the recessions.
The best way to solve Social Security’s financial challenges is to privatize all of its components. However, liberals have long resisted privatizing the income security portion, arguing that the stock market is too volatile and that workers can’t be trusted to make good investment decisions.
But privatizing Social Security’s disability insurance and survivorship benefits doesn’t depend on people making good investments. Workers could choose from a number of qualified disability and life insurers, and a portion of their payroll tax would go to the insurers rather than the government. Democrats who supported Obamacare will find it difficult to argue that we cannot allow taxpayers’ dollars to go to private sector insurers. Nor can they argue it’s a risky scheme since three counties have been doing it for nearly 35 years.
Insurers would police the system for fraud and abuse, which the government clearly has not done—costing taxpayers billions of dollars. And privatizing the disability insurance provision would strengthen seniors’ retirement trust fund, since the government wouldn’t need to rob from it to pay disability claims.
These two changes won’t solve all of Social Security’s financial problems, but they would be a good start.