Disability: Economic Costs and Insurance Protection

In 1956 legislation added disability insurance (SSDI) to the U.S. Social Security program. Benefits are calculated approximately like retired worker benefits, based upon average indexed monthly earnings over a period defined by the individual's year of disablement. Currently about 5 million individuals are SSDI beneficiaries, receiving an average of about $787 per month.

To be eligible for disability benefits, in general a person needs to have been employed in covered work for forty quarters, as is the case for retired-worker benefits. However, for disability benefits, twenty of those quarters must be earned in the 10-year period ending in the year in which the person became disabled, and younger workers may qualify with fewer quarters. Disability applications are considered up to age sixty-five, after which applicants are considered for retired-worker benefits. Persons who received disability benefits prior to age sixty-five are administratively converted to retired-worker status with no change in benefit amount. They are then subject to retired-worker benefit rules.

Eligibility for SSDI benefits requires total disablement—the inability to work either in the job performed prior to disability or in any other job the individual would be able to perform given his or her marketable skills. Disablement is determined either by a person having a listed medical condition that is considered so severe that it leads to automatic determination of eligibility or by a person's nonlisted condition being determined to be so severe as to prohibit employment in any work for which he or she is qualified. The disability must be expected to last at least one year. While disablement typically is medically determined, earnings of more the $780 a month (in 2002, adjusted annually by the average rise in wages) is evidence of a person's being able to work, and therefore not sufficiently disabled for SSDI benefits. This level of earnings is also considered evidence that a person already receiving SSDI no longer has a work-limiting disability. In order not to discourage reentry into the workforce by younger disabled persons, the SSDI program allows a period of earnings and continued Medicare coverage.

Disability benefits are based on average indexed monthly earnings (AIME), which are equal to total indexed covered earnings averaged over the number of years between 1956 or age twenty-five (whichever is later) and the year prior to the disablement. Average indexed monthly earnings are converted to a primary benefit amount using the same formula used for calculating the primary benefit amount for retired workers. There are several important distinctions between disabled-worker and retired-worker status. First, in calculating benefits, the earnings averaging period ends at the date of disablement, and thus can be of different length for persons of the same age. For retired workers, that period remains the same for individuals in the same birth cohort, regardless of date of retirement. Second, disabled-worker benefits are payable to individuals below age sixty-two, the minimum age of eligibility for retired-worker benefits. Third, individuals receiving disability benefits before age sixty-five are not assessed an early retirement penalty. Thus, a person applying for SSDI between ages sixty-two and sixty-four will not have his or her benefits lowered by the actuarial reduction that would be imposed for receipt of retired-worker benefits. Fourth, SSDI brings eligibility for Medicare at an age younger than sixty-five, the age at which retired-worker beneficiaries become eligible for Medicare.

Thus a worker who ceased paid work (voluntarily or involuntarily) at age fifty-five and applied for Social Security retirement benefits at age sixty-two would have an AIME calculated over a period that included seven years of zero earnings (between ages fifty-five and sixty-two) and a benefit that was reduced by 20 percent for early receipt. If the same worker were able to qualify for disability at age fifty-five, the averaging period would be reduced by those seven years, and no actuarial reduction would be imposed. Thus, older workers able to meet the Social Security disability criteria—which are somewhat relaxed at ages above fifty (Ycas)—may assess early SSDI application to be a better option than (1) later application for SSDI benefits or (2) delaying receipt until becoming eligible for retired-worker benefits.

Additional benefits are payable to the spouse, children, and survivors of disabled workers under eligibility rules identical to those for spouses, children, and survivors of retired workers. Benefits are payable to a spouse who is sixty-two or older (or at any age if he or she is caring for a child who is under age sixteen, or is disabled), although the spouse may receive only the higher benefit for which she or he is eligible from Social Security. Survivor benefits are payable at age sixty, although if the survivor is disabled, they may be received as early as age fifty. However, the disability must have started before the worker's death or within seven years after the death.