Mental Health Could Have Major Impact on Social Security Trust Fund

In June, the trustees of the Social Security and Medicare trust funds released their annual report about the financial status of the programs. The future of the old age survivor insurance (OASI) fund looks bleak as the 2033 depletion date is rapidly approaching. In comparison, the trustees projected a surplus for the disability insurance trust fund. When considered together, the OASDI depletion projection is 2034.

Trustees Report Projections for the Disability Trust Fund

Following the recent trend, the report assumes disability claims will continue to decrease. Instead of the current 5 per 1,000 people claiming, the trustees estimate that 4.8 per 1,000 people will claim disability. That change alone represents 60% of the movement in the trust fund projections.

Historically, there have been more significant shortfalls in the disability insurance trust fund than in the old age survivor insurance trust fund. Congress allocated money from the OASI trust fund to address the funding issues and effectively blended the two. If the disability trust fund experience follows as projected, Congress could move funds from the disability trust fund to the OASI trust fund to help shore up the retirement benefit shortfall. But will the projected disability surplus materialize, or will disability claims increase and eliminate the surplus?

Could Disability Claims Increase?

According to the World Health Organization, the COVID-19 pandemic has directly affected many people's mental health. In 2020, there was a 27.6% increase in cases of major depressive disorder and a 25.6% increase in anxiety disorders. People are leaving the workforce due to mental health, and some of these mental health conditions, including anxiety and depression, are covered by Social Security disability.

Why are disability claims decreasing if the number of people with mental health disorders continues to increase? In the first years of the pandemic, the federal government offered financial assistance. The 2020 CARES Act paused federal student loan payments and stopped interest from accruing. In addition, individuals who earned less than $75,000 received tax rebates.

With pandemic-related financial help easy to access, following an arduous process to claim disability benefits may have seemed inane. Further, to claim disability benefits for mental health conditions, a two-year record of symptoms and treatment is generally required. Since we have just recently crossed the two-year mark from the beginning of the pandemic, we are close to the beginning of what could be a spike in initial disability applications related to mental health.

It's also important to consider the economic impact of the pandemic. Financial troubles are often accompanied by a spike in disability claims. During the Great Recession, there were massive layoffs and a significant increase in disability applications. We could potentially see this scenario play out again.

Any substantial change in a projection due to a change in assumptions is meaningful, particularly when it's an assumption that might not hold true in a post-pandemic world. The disability fund would pay for an increase in disability claims. Congress can't approve allocating surplus from the DI to OASI to alleviate the retirement benefit shortage if there is no surplus to allocate.

At the beginning of the trustees reports for the last couple of years, there has been a disclaimer that mentions that we still don't know the full impact of the pandemic. An increase in disability claims is a pandemic impact that financial advisors should consider.

Joe Elsasser is the founder and president of Covisum, a financial technology company focused on creating software that improves lives through better financial decisions. Covisum helps financial advisors serving mass-affluent clients in or near retirement and powers some of the nation's largest financial planning institutions.