Primer on Disability Benefits: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI)

Scott Szymendera
Analyst in Disability Policy

Generally, the goal of disability insurance is to replace a portion of a worker's income should illness or disability prevent him or her from working. Individuals may receive disability benefits from either federal or state governments, or from private insurers. This report presents information on two components of federal disability benefits, those provided through the Social Security Disability Insurance (SSDI) and the Supplemental Security Income (SSI) programs. The SSDI program is an insured program that provides benefits to individuals who have paid into the system and meet certain minimum work requirements. The SSI program, in contrast, is a meanstested program that does not have work or contribution requirements, but restricts benefits to those who meet asset and resource limitations. 

The SSDI program was enacted in 1956 and provides benefits to insured disabled workers under the full retirement age (and to their spouses, surviving disabled spouses, and children) in amounts related to the disabled worker's former earnings in covered employment. The SSI program, which went into effect in 1974, is a needs-based program that provides a flat cash benefit assuring a minimum cash income to aged, blind and disabled individuals who have very limited income and assets. 

To receive disability benefits under either program, individuals must meet strict medical requirements. For both SSDI and SSI disability benefits, "disability" is defined as the inability to engage in substantial gainful activity (SGA) by reason of a medically determinable physical or mental impairment expected to result in death or last at least 12 months. Generally, the worker must be unable to do any kind of work that exists in the national economy, taking into account age, education, and work experience. 

Both programs are administered through the Social Security Administration (SSA) and therefore have similar application and disability determination processes. Although SSDI and SSI are federal programs, both federal and state offices are used to determine eligibility for disability benefits. SSA determines whether someone is disabled according to a five-step process, called the sequential evaluation process, where SSA is required to look at all the pertinent facts of a particular case. Current work activity, severity of impairment, and vocational factors are assessed in that order. An applicant may be denied benefits at any step in the sequential process even if the applicant may meet a later criterion. 

The SSDI program is funded through the Social Security payroll tax and revenues generated by the taxation of Social Security benefits, portions of which are credited to a separate Disability Insurance (DI) trust fund. In contrast, the SSI program is funded through appropriations from general revenues. 

This report will be updated as warranted. 

Date of Report: February 2, 2010
Number of Pages: 11
Order Number: RL32279
Price: $29.95

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The Federal Government Debt: Its Size and Economic Significance

Brian W. Cashell
Specialist in Macroeconomic Policy

After several years of surpluses in the late 1990s, the federal budget has been in deficit since FY2001. Deficits represent the additional borrowing required in each year to bridge the gap between tax revenues and spending outlays. Each deficit adds to the already existing stock of outstanding federal debt. 

Some of those deficits may have seemed large at the time, but the budget deficit for FY2009 was unprecedented, in dollar terms, and the FY2010 deficit is also expected to be much larger than those of past years. The prospect of such rapid growth in the federal debt may seem alarming, and some might wonder how much the debt can grow before it poses significant economic risks. 

In a slack economy, federal borrowing and spending can stimulate growth in output in the short run. As the economy approaches full employment, federal government borrowing adds to total credit demand and tends to push up interest rates. Higher interest rates increase the cost of financing new investment in plant and equipment and thus may tend to reduce the stock of productive capital below what it might otherwise have been. That would tend to reduce the longrun rate of growth. 

In the long run, the relationship between the growth rate of the federal debt and the overall rate of economic growth is critical to economic stability. As long as the debt grows more rapidly than output, the ratio of debt to gross domestic product (GDP) will rise. Debt growth in excess of economic growth is ultimately unsustainable. Whether the debt-to-GDP ratio is on such a path depends on the size of the budget deficit, the rate of interest, and the rate of growth in GDP. 

What matters most, as far as economic stability is concerned, is what investors believe to be the long-run outlook for the debt-to-GDP ratio. If large deficits are expected to persist, or if the interest rate on the debt is expected to exceed the growth rate indefinitely, then at some point the federal government may begin to find it more difficult to sell new securities. 

Should the federal government be unable to find private sector buyers, the Federal Reserve might buy Treasury securities in order to sustain their marketability. Should it decide to do so, then the threat is no longer one of government insolvency, but rather of inflation. 

Date of Report: February 3, 2010
Number of Pages: 14
Order Number: RL31590
Price: $29.95

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The Economics of the Federal Budget Deficit

Brian W. Cashell
Specialist in Macroeconomic Policy

The Congressional Budget Office (CBO) estimates that the federal budget deficit for FY2009 was $1,414 billion, triple the $459 billion deficit recorded in FY2008. The CBO expects the deficit for FY2010 to be $1,349 billion. The estimate for 2010 is based on current law. The budget deficit in FY2009 was, in dollar terms, unprecedented. Compared to the overall economy, the $1.4 trillion budget deficit equaled 9.9% of gross domestic product (GDP). In 1943, the budget deficit reached 30.3% of GDP. Since 1946 and before now, the largest the budget deficit had been, relative to the overall economy, was 6% of GDP in 1983. 

Over fairly short periods of time, say three or four years, fiscal policy can affect the rate of economic growth by adding to, or subtracting from, aggregate demand. For a time, the effect on the economy may even be larger than the initial change in the budget. These effects, however, tend eventually to diminish because of either higher interest rates or rising prices. There are varying estimates of the total effect on the economy of a change in fiscal policy, but most of them suggest that it reaches a peak somewhere between one and one-and-a-half times the size of the change in the budget. Most macroeconomists believe that effect is realized within one or two years of the initial change in policy. 

One measure economists use to assess fiscal policy is the structural, or standardized-employment, budget. This measure estimates, at a given time, what outlays, receipts, and the surplus or deficit would be if the economy were at full employment. Although the actual budget was in surplus beginning in 1998, the standardized measure first registered a balanced budget in 1999. Between 1992 and 2000, the actual budget surplus increased from -4.5% (a deficit of 4.5%) to 2.5% of gross domestic product (GDP), a shift of 7.0 percentage points. During the same period, the standardized measure rose from -3.3% to 1.1% of GDP. That suggests that a little more than half of the shift was the result of changes in policy, and a little less than half was attributable to the economic expansion. Between 2000 and 2007, the actual surplus fell from 2.5% to -1.2% of GDP, whereas the standardized measure fell from 0.9% to -1.6% of GDP. That the two measures were so close in 2007 suggests that the economy was then near full employment. That the standardized measure fell between 2000 and 2007 indicates an expansionary fiscal policy over the period. Between 2007 and 2009, the standardized budget deficit increased from 1.2% to 7.3% of GDP, indicating a substantially expansionary fiscal policy. 

In the long run, economic growth is determined primarily by three factors: growth in the labor force, the rate of technological advance, and the amount of capital available to the workforce. Of the three, the last one may be the most susceptible to the influence of policymakers. The larger the capital stock, the more productive the labor force tends to be. Although it is possible for fiscal policy to have an effect on the rate of technological progress in the way public money is spent, many believe that it has a larger effect on growth through its influence on the size of the domestic stock of capital and the amount of capital available for each worker in the labor force.


Date of Report: February 2, 2010
Number of Pages: 14
Order Number: RL31235
Price: $29.95

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Tax Gap, Tax Enforcement, and Tax Compliance Proposals in the 111th Congress

James M. Bickley
Specialist in Public Finance

Recent and projected large federal budget deficits have generated congressional interest in the feasibility of raising revenue by reducing the tax gap. The Internal Revenue Service (IRS) defines the gross tax gap as the difference between the aggregate tax liability imposed by law for a given tax year and the amount of tax that taxpayers pay voluntarily and timely for that year. And it defines the net tax gap as the amount of the gross tax gap that remains unpaid after all enforced and other late payments are made for the tax year. For tax (calendar) year 2001 (the most recent year available), the IRS estimated a gross tax gap of $345 billion, equal to a noncompliance rate of 16.3%. For the same tax year, IRS enforcement activities, coupled with other late payments, recovered about $55 billion of the gross tax gap, resulting in an estimated net tax gap of $290 billion. 

The estimated gross tax gap of $345 billion consisted of underreporting of tax liability ($285 billion), nonfiling of tax returns ($27 billion), and underpayment of taxes ($33 billion). (Taxes on illegal activities are excluded from these estimates.) Most of the underreporting of tax liability concerned underreporting of individual income liability ($197 billion). The percentage of individual income that was underreported varied significantly depending on the degree of information reporting and whether or not withholding was required. 

The IRS replaced the Taxpayer Compliance Measurement Program—a systematic approach for estimating the tax gap—with the National Research Program (NRP). One of the guiding principles for the NRP was to minimize the compliance burden on those taxpayers selected for audit in the NRP sample. The new methodology of the NRP was applied to the underreporting gap for the individual income tax for tax year 2001. 

Estimates of the gross tax gap have been heavily publicized; perhaps as a result, some public officials have emphasized better enforcement of tax laws in order to raise revenue. Three factors affect the dollar amount that can be collected by increased enforcement. First, much of the gross tax gap for individual income tax filers is due to types of unreported income that are difficult to detect. Second, some of the detected tax liability cannot be easily collected, particularly from those taxpayers who are currently unable to pay. Third, many detected tax liabilities are so small relative to enforcement costs that it is not cost-effective to pursue collection. 

From FY2001 to FY2007, greater tax enforcement efforts by the IRS increased enforcement revenue from $33.8 billion to $59.2 billion. For FY2008, the IRS reported a decline in enforcement efforts and a reduction in enforcement revenues to $56.4 billion. IRS funding for enforcement rose for FY2009, but enforcement revenues declined to $48.9 billion. The IRS attributed this decline in revenues to the recession and the closing of a significant number of highgrossing tax shelter cases. The Office of Tax Policy developed a strategy it terms "comprehensive, integrated and multi-year" to reduce the tax gap. In the 111th Congress, enforcement areas include tax shelters, the earned income tax credit, tax exempt organizations, and tax havens. After a review of return preparers, the IRS has formulated eight new regulations applicable to tax return preparers, which it will begin implementing in 2010. 

As of February 2, 2010, nine bills have been introduced in the 111th Congress relevant to the tax gap: H.R. 572, S. 265, H.R. 735, H.R. 796, S. 569, H.R. 1265, S. 506, H.R. 2268, and S. 1934. 

This report will be updated as issues develop or new legislation is introduced. 


Date of Report: February 2, 2010
Number of Pages: 19
Order Number: R40219
Price: $29.95

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Individual Retirement Accounts (IRAs): Issues and Proposed Expansion

Thomas L. Hungerford
Specialist in Public Finance

Jane G. Gravelle
Senior Specialist in Economic Policy

Current law provides many incentives to promote saving. The goal of these provisions is to increase saving for special purposes such as education or retirement, and to increase national saving. Increased national saving can lead to faster wealth and capital accumulation, which can boost future national income. 

An increasingly important retirement saving vehicle is the individual retirement account (IRA). IRA savings is encouraged by two mechanisms—a carrot approach and a stick approach. First, tax provisions allow individuals to defer taxes on IRA contributions and investment earnings or to accumulate investment earnings tax free. Second, withdrawals before the age of 59½ are generally subject to a 10% penalty tax in addition to regular taxes. 

There are two types of IRAs: the traditional IRA and the Roth IRA. The traditional IRA allows for the tax-deferred accumulation of investment earnings, and some individuals are eligible to make tax-deductible contributions to their traditional IRAs while other individuals are not. Some or all distributions from traditional IRAs are taxed at retirement. In contrast, contributions to Roth IRAs are not tax deductible, but distributions from Roth IRAs are not taxed on withdrawal in retirement. Expanded contribution limits were adopted in 2001, but were scheduled to expire after 2010; the Pension Protection Act of 2006 made those increases permanent. 

In November 2005, President Bush's Advisory Panel on Federal Tax Reform proposed changes to IRAs. The panel's plan would have created Save for Retirement Accounts (SRAs) to replace traditional and Roth IRAs. Additionally, President Bush proposed consolidating IRAs into a Rothstyle retirement savings account. The Obama Administration appears to be taking a different tack by proposing additional incentives to increase saving by low- and moderate-income workers in existing retirement saving accounts that have proven effective in evaluations. 

Neither conventional economic theory nor the empirical evidence on savings effects tends to support the argument that increased IRA contributions are primarily new savings—often increased retirement saving comes at the expense of reduced nonretirement saving. Roth-style accounts are less likely to induce new private savings than are traditional ones. Furthermore, these proposals would predominantly benefit higher-income individuals and families who are the ones most likely to save without the added incentive. 

Proposals that increase retirement saving among low- and moderate-income workers could be effective in increasing new saving because these workers typically have little or no nonretirement saving to reduce. 

This report will be updated as legislative developments warrant.


Date of Report: February 2, 2010
Number of Pages: 23
Order Number: RL30255
Price: $29.95

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