We're hearing some bad news about the trust fund that funds Social Security Disability Insurance (SSDI), and that translates to extremely bad news for individual and ERISA Long Term Disability Insurance companies and their claimants. Two reports were issued in late July - one from the Board of Trustees from Medicare and a second from the Social Security trustees. They make for dense reading, but the information contained in these reports is critical if you are on claim for disability, or expecting to go on claim for disability. The economy may be recovering, but these two funds are not.
The problem is an unanticipated result of Congress temporarily cutting payroll taxes in 2011 and 2012 in an effort to help a national economy that was barely breathing. Those cuts led to a massive amount of loss of income for SSDI trust funds. The end of the payroll tax holiday has not brought much relief, as payroll tax revenues continue to be low. Interest rates also continue to be low. The report expects the SSDI fund to run dry in 2016 - which is just around the corner. The SSDI program is expected to have enough income from payroll tax revenues to meet about 80 percent of its benefits obligations. That's fine if you are in the 80 percent - but it's likely that Congress will need to either increase payroll taxes, or SSDI will have to cut current and future benefits.
Why do you care, if your disability benefit comes from a big insurance company?
If you read the fine print in any disability contract, you'll see that the insurance company has the right to deduct any amount of benefits a claimant receives from SSDI. Most contracts require you to file for Social Security Disability Insurance benefits also. If you have a policy that pays a $2,000 monthly benefit, and win a $660 SSDI award, the insurance company cuts your monthly claim by $660. This is called a Social Security Offset, and it's totally legal, even though we have always found it pretty suspect.
But if SSDI goes bust, the offset does too, and the disability insurance company will be on the hook for the entire monthly benefit. The offsets will add up fast, and we know that the first place the insurance companies will look for funds to protect their assets will be their own portfolio of current disability claims. It's the easiest place to deny or delay payments. The cost of stalling a claim, or denying it, is very low to the insurance company. The cost to claimants - enormous. We would expect to see a tremendous uptick in denied or terminated disability insurance claims if SSDI goes bust.
Now that the reports have been released, it's up to Congress.