The Income Umbrella (AP Photo/Charles Dharapak)

The Federal Disability Insurance (DI) Trust Fund doesn’t really have a long-term outlook.

The trustees of the DI Trust Fund observe in their annual report on the status of the fund that, “The DI Trust Fund does not satisfy the short-range test of financial adequacy.”

The fund ended 2011 with just $154 billion in assets, down 15% from the asset total it had a year earlier.

The DI Trust Fund is supposed to fund itself with a 1.51% tax on payroll subject to payroll taxes. The DI payroll tax rate is 0.61% for employees and 0.91% for employers.

The trust fund’s revenue has fallen every year since 2007 and totaled just $106 billion in 2011, down 5.8% from the 2010 total and down 19% from the 2007 total.

One reason revenue is down is that the fund invests its assets in government obligations, and interest rates on government bonds are at or near record lows. The effective annual interest rate the DI Trust Fund earns fell to 4.8% in 2011, from 4.9% in 2010. 

Thanks to the flow of payroll tax revenue, the DI program should have enough cash to make benefits payments over the next 10 years if intermediate assumptions about economic conditions and other conditions hold up, the trustees say.

But the DI Trust Fund itself could be empty as early as 2016, or two years earlier than predicted a year ago, the trustees say.

The trust fund for Social Security old age benefits could keep going until 2035, the trustees say.

One short-term solution would be for lawmakers to shift some of the payroll tax revenue that’s supposed to fund the old age benefits into the DI Trust Fund.

Lawmakers last did that back in 1994.

My reaction to this is that we, as a nation, have decided to take the worst possible middle course between the welfare state approach and the pure free-market approach.

Advocates of a strong welfare state would say that we ought to offer rich benefits for the unfortunate. Certainly, any of us could become disabled. Almost all of us want to help people with disabilities, even if we’re not thrilled with paying taxes. Time to shut up and pay up.

Advocates of a pure free market approach might say that workers ought to save for bad outcomes, buy disability insurance, or recognize that they will have to depend on the voluntary charity of relatives, friends and strangers. The advocates of a pure free market approach might say that, even though a transition to this approach might cause some pain, the resulting increase in economic efficiency and honesty might actually ease any genuinely unfair income inequality, reduce the number of people who are poor, and give solvent people more disposable income that they can use to contribute to charity, including charities that help people with disabilities.

Instead, it seems as if the United States has adopted the blow dryer approach. We promise pretty good benefits and fund them with a trust fund filled with a bunch of hot air.