Washington, DC -- (ReleaseWire) -- 09/22/2015 --BENNETT: Veronique de Rugy is a senior research fellow at the Mercatus Center and a columnist for the Reason magazine. De Rugy was previously a resident fellow at the American Enterprise Institute, a policy analyst at the Cato Institute, and a research fellow at the Atlas Economic Research Foundation. She recently wrote an article which caught my attention and stunningly, the title is "The Social Security Disability Fund Will Be Broke Next Year." Veronique, welcome to Financial Myth Busting.
DE RUGY: Thank you for having me.
BENNETT: I wanted to start off by explaining to our listeners that may not be familiar about how Social Security is structured. It's actually made up of two primary funds: one is an old age and survivors' insurance, that's OASI, and the second is disability insurance, which is DI. Essentially, all the taxes paid into Social Security end up in one of these two trust funds, which brings us to the disability insurance trust, which in my understanding is in particularly ugly shape. In fact, I understand the trustees of the fund are basically saying they are financially inadequate to be able to deal with things, and that everything's going to be depleted out of the fund or the reserves by fourth quarter, 2016. Veronique, does this mean that if you are 47 years or younger, you can kiss Social Security goodbye?
DE RUGY: Well, not exactly. It just means you're going to face a cut, overall cut to your benefits. And I want to explain this a bit more to your listeners. What happened in the '80s is that under the Reagan administration, a commission, led by Alan Greenspan, of all people, recommended pretty fundamental reforms to Social Security that were put in place. And it used to be a pay as you go system, so you would collect payroll tax, and then benefits would be paid. And then that at some point became bankrupt, so they came up with this system, which gave us the trust funds, where basically they increased the payroll tax collected, and the difference between the amount of benefits paid in a given year and the amount of taxes collected, that went into the trust fund. And that worked really well until basically 2008 for the Social Security disability trust fund, and 2010 for the other one. And what's happening at that time is the benefits paid exceeded the tax collected. And that's where the trust fund came in handy, which is all these taxes that were actually put into the trust fund, and then turned into IOUs, so the programs would go to the trust fund, ask for an IOU, return them to Treasury to give us our money back. And what it's meant is two things; one, from these dates, for each program, the different programs became permanently cash flow deficit. It means they had-- permanently they would never collect enough taxes to pay benefits, and had to start digging into the trust fund assets. But also what it meant, obviously, is that the trust fund started being depleted. And that's when those trust funds were depleted completely that the crash happened. And there were fewer assets in the disability trust fund, and as a result, at the end of 2016, basically people on disability and getting benefits will see their benefits cut by 19%.
BENNETT: Veronique, in your article you also describe how the program's expenses have sky-rocketed almost since inception, now clocking in at more than about $150 billion a year. Are Americans getting increasingly fragile, or is this just a pile of free money that the government basically gives out to anyone who asks?
DE RUGY: I think in the '80s another thing that happened is they extended eligibility for disability. In '84 what they did is they extended eligibility standards. And one of the things that they did is that they started to allow for disabilities such as back pain or mental breakdowns and things that are very hard to actual verify. And as a result, from then forward we saw a massive expansion of the disability payroll, and basically people applying, and since it's very hard to actually check that people just first of all have back pains, or actually have back pains, but it's not debilitating enough that they can't work, then you start seeing the program balloon and payments grow fast. But, I mean, it's important to say this, that benefits paid have actually doubled since 1998. So in that short span of time, we've doubled the amount of benefits paid.
BENNETT: Does this mean that other benefits need to be cut, in order to be able to keep up with the payments, with the aging demographic here in the United States?
DE RUGY: Other programs outside of disability?
BENNETT: That's correct.
DE RUGY: Well, so, I don't think that government ever really reverts to this. What they do is that they're going to try to raise taxes or they're just going to actually borrow more money. Ideally, what they will do is they will do a fundamental revamp of our Social Security program and disability. I think they should really do a hard examination of the standards of eligibility. They should also put a limit on how long you can be on disability, with exceptions, of course, because there are people who are genuinely just disabled, that cannot work. They may even put a limit on income levels that allow you to qualify for disability. So that's what they should do. But unfortunately Congress isn't very good at doing what they should do, and instead, I think what they're going to do is they're first going to try to get the assets that are in the retirement trust fund, basically like they're massively kicking their cans down the road, so making the retirement trust fund even closer to insolvency, and they won't reform Social Security insurance, unfortunately.
BENNETT: Those are your ideas. Has there been any talk about how this crisis will be resolved from the government, or is it just the plan to wait until the last second, and then cram through a horrible patch that everyone hates?
DE RUGY: I think there's a lot of people actually talking about all the things that should be done. I know that the House, on the Republican side, they passed a law to try to forbid congress from accessing the assets in the retirement side of Social Security to bail out the disability trust fund. But I know the Democrats have made a lot of noise about transferring assets from the retirement side. There are a lot of policy people who've been talking for a long time. This is not new; we've known that this was coming for a very, very long time, so there are a ton of policy ideas out there. The question is, how do you convince congress that kicking the can down the road is absolutely not the right thing to do?
BENNETT: If you were hired to reform Social Security, Veronique, would you propose any other type of solution? Is saving Social Security even something we should try to do?
DE RUGY: I mean, I'm pretty radical on this. I think we should be asking a really hard question about whether it is the role of the federal government to provide disability insurance, or whether there are ways we should encourage the private sector to do it, or maybe actually just reform the whole anti-poverty program system and have a real safety net that is available, based on income, rather than age, rather than, like, you know, disability or housing or things like that. I think there are a lot of conversations that we're not having.
That being said, the next step for me would definitely be to really shrink and scale back Social Security disability eligibility to the people, in order to actually only make it benefit the people who are genuinely disabled and are totally unable to work. Because there are a lot of people who can work, and they may be disabled in one form or another, but it doesn't mean that they can't work at all. So for instance, even if they're in a wheelchair, obviously there are a lot of jobs you cannot do, but it doesn't mean that you can't do anything at all. And I'm not saying that this would apply to everyone, again, but I think we need to have a conversation, because the thing that's pretty striking about Social Security and disability insurance is we see people use it as an unemployment insurance. So for instance, when the unemployment rates go up, there's no reason why people should be more disabled. However, we see the rolls of disability go up at the same time, so there's just a lot of abuse of that system.
BENNETT: Among the 2016 candidates, do you see any with a stand-out plan for reforming entitlements? Chris Christie, so far, is the one who's made the biggest name for himself as the guy who would rein them in. What do you think?
DE RUGY: Well, I don't hear them talk about addressing the problem with disability insurance. All of them are pretty firmly committed to keeping Social Security, because a lot of them assume that their electorate is seniors, so people depending on Social Security, independently of their income levels. Marco Rubio, I think, is pretty solid. He has solidly said that he's going to reform entitlement. Scott Walker has actually offered a plan for reforming healthcare. I mean, it's not a plan I like, but at least he's made an attempt to offer a pretty detailed plan. So I think they're making some noise, they know it needs to be done, but not many of them have actually put out a plan to address the problem.
BENNETT: On another topic, Politico just credited you with being one of the leading reasons why the Export-Import Bank was deep-sixed. And President Obama, I understand, still hopes to bring it back from the dead. Do you think your accomplishment will survive, or will this be yet another government program that helps prove that there is such thing as an eternal life?
DE RUGY: If you had asked me this three weeks ago, I would have said that it's definitely going to come back. I think the chances that it will come back are very high. However, no one thought that we could accomplish what we have accomplished, meaning the charter was not going to be re-authorized, and no one thought it would last longer than a month, and now a lot of people say, 'Oh, it's not going to be re-authorized in September.' And the longer we wait, the more we'll see that the consequences, the sky is falling kind of consequences that everyone has warned would happen if the charter wasn't re-authorized, is just not happening. I also think that the American people are fed up with cronyism, and the Export-Import Bank is the poster child for that, and so I don't know. I actually think even if it's re-authorized, we've accomplished a ton, because we've actually shown that central interests, no matter how entrenched, can actually be endangered. I mean, think about it; Boeing was the main beneficiary. It actually spent, in the last four years, $17 million in lobbying, and it spent over $10 million specifically on the Export-Import Bank, to get it re-authorized in the last quarter, and that hasn't worked.
DE RUGY: Yeah, so I think we've accomplished a lot, because I think people now know what it is, they do understand. The only reason why we don't have everyone on our side, one, is politics; the other one is special interest.
BENNETT: Who else, besides Boeing, actually supported it?
DE RUGY: Well, there are 10 companies that benefit from 64% of the Export-Import Bank, and that's GE, Caterpillar, all very big, giant corporations.
BENNETT: And you won against them, so to speak.
DE RUGY: Well, at least temporarily.
BENNETT: At least temporarily. Veronique, I loved your article. Can you share with our listeners where to get it? Again, the title was "The Social Security Disability Fund Will be Broke Next Year." It's just a stunning, stunning title, and I think people need to start paying attention to this, and particularly those who actually rely on it.
DE RUGY: At mercatus.org, you'll find a lot of my work. And my colleagues have worked a ton on that issue, on the policy side. So if your listeners are interested in the issue, they will find a ton of information on our website.
BENNETT: Do you think it's possible that maybe the private sector might bail out the Social Security, that that's where the government's going to go, since they don't have any money?
DE RUGY: What do you mean by the private sector? Like, raise taxes?
BENNETT: Raise taxes, have a special fund, have a special tax.
DE RUGY: I don't know. I think one of the things that probably is going to happen is that they're going to basically need to test the program further than it is already, and they're probably going to try to raise taxes. But I'm not exactly sure what they're thinking. I think there's the moment where the problem becomes so big that they will have no other problem to focus on, so they'll do some fundamental reforms. It won't be enough, but I think they won't be able to just raise taxes and just do the same old tricks.
BENNETT: Thank you, Veronique.
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.