Plan for cuts in disability benefits, but hope for the best

Robert Powell | Special to USA TODAY

The future for Medicare and Social Security might not look bright at the moment, but it’s particularly bleak for the government’s disability insurance program.

According to the Social Security trustees’ report released last month, the disability insurance trust fund will run out money in 2016 and it needs immediate attention. In the absence of any attention, millions of Americans will receive an automatic 19% reduction in their Social Security disability benefits in the fourth quarter of 2016. In 2015, the average Social Security disability insurance benefit amount was $1,165 per month, but beneficiaries can receive up to $2,663,

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Why the cuts? Social Security is precluded from spending money it doesn’t have, according to a recent report by the Center for Retirement Research at Boston College; benefits must be in accord with disability insurance payroll tax revenues.

To be fair, most experts don’t expect lawmakers in Washington, D.C., to cut Social Security disability insurance benefits. “The reality of the situation is that Social Security disability insurance benefits play a vitally important role in the lives of just under 11 million people in this country today, nearly 9 million disabled workers, along with an additional 2 million family members, including 1.7 million children,” says Kurt Czarnowski, a principal with Czarnowski Consulting in Norfolk, Mass.

Social Security disability insurance pays benefits to you and certain members of your family if you are “insured,” meaning that you worked long enough and paid Social Security taxes, according to the Social Security Administration’s website.

So what’s a person to do?

Don’t panic just yet. For his part, Czarnowski predicts there’ll be a re-adjustment of the payroll tax rate between the Old-Age and Survivors Insurance (OASI) and the disability insurance (DI) funds, “just as has occurred on numerous occasions in the past.”

In 1994, for instance, Congress reallocated 0.6 percentage points of the payroll tax from the OASI program to the DI program — and no one noticed, says Andy Landis, founder Thinking Retirement in Seattle of author Social Security: The Inside Story, 2014 Edition: An Expert Explains Your Rights and Benefits.

“With that relatively minor adjustment, across-the-board cuts to 11 million people can be avoided, and 100% of the promised disability benefits can still be paid,” says Czarnowski.

Such a reallocation could also significantly extend the life of the DI trust fund, while not having a serious effect on the retirement portion of the Social Security program — the OASI portion, according to the Center for Retirement Research report.

In fact, “reallocating taxes to put the two trust funds on an even footing would prolong the DI trust fund by 18 years, from 2016 to 2034, while advancing the OASI fund’s depletion date by just one year, from 2035 to 2034,” according to the Center for Retirement Research. Read Social Security’s Financial Outlook: The 2015 Update in Perspective.

Prepare for the worst. Prepare, if you haven’t already, a balanced budget that contemplates, No. 1, a 19% reduction in your Social Security disability insurance benefits and, No. 2, reductions to essential and discretionary expenses, says Brian Vosberg, president of Vosberg & Associates in Glendora, Calif., and author of The Complete Retiree's Guide to Social Security.

Turn assets into income. If you can’t balance your budget, consider taking withdrawals from your savings and investment accounts to make up for the reduced benefit, says Vosberg.

Seek employment if you are able to work. The Social Security Administrations allows for a trial work period, says Vosberg. “The trial work period allows you to test your ability to work, earn income and still collect your disability benefits,” he says. “After your trial period is up, you have 36 months that you can work and still collect disability benefits as long as they are not deemed ‘substantial.’”

Write your representatives and senators. Voice your displeasure with how Congress is managing the affairs of this country, says Stephen Stellhorn, president and CEO of MSM Capital Management in Tampa and author of Navigating the Maze of Social Security.

“This problem is a legislative one, which Congress must address,” Stellhorn says. “What makes 2016 so unique is there is a presidential election occurring. This will usher in an entirely new president assuming the executive branch in early 2017. So our current president and Congress will need to craft a solution to this problem between now and then.”

That solution, Stellhorn says, is likely to include “tightening of eligibility standards, reducing benefits, possible implementation of a specific disability insurance payroll tax and/or increasing the Social Security retirement age.”

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.