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Policy Basics: Social Security Disability Insurance

What Is Social Security Disability Insurance?

Disability Insurance (DI) is an integral part of Social Security.  It provides modest but vital benefits to workers who can no longer support themselves on account of a severe and long-lasting medical impairment.  The Social Security Administration (SSA) administers the DI program.

In December 2014, nearly 9 million people received disabled-worker benefits from Social Security.  Payments also went to some of their family members:  150,000 spouses and 1.8 million children.

DI benefits are financed primarily by a portion of the Social Security payroll tax and totaled about $141 billion in 2014.  That’s 4 percent of the federal budget and less than 1 percent of the gross domestic product (GDP).  Employers and employees each pay a DI tax of 0.9 percent on earnings up to a specified amount, currently $118,500.  Financial transactions are handled through a DI trust fund, which receives payroll-tax revenues and pays out benefits and which is legally separate from the much larger Social Security retirement fund.  Under current projections, the DI trust fund will need replenishment in late 2016.

Who Is Eligible for DI?

DI protects more than 150 million workers.  To become eligible, beneficiaries must meet stringent criteria:

  • Insured status.  Beneficiaries must be both fully insured and disability insured.  Being fully insured means they must have worked for at least one-fourth of their adult lives.  Being disability insured means they must have worked in at least five of the last ten years.
  • Severe impairment.  A beneficiary must suffer from a severe, medically determinable physical or mental impairment that has lasted for five months and is expected to last 12 months or result in death.
  • Inability to perform substantial work.  The beneficiary’s physical or mental impairment must render him not just unable to do his past work, but unable — considering his age, education, and work experience — to do any other kind of substantial work.  “Substantial work,” in 2015, means the inability to earn $1,090 a month ($1,820 for the blind), which is less than 40 percent of the median earnings of a full-time worker with a high-school diploma but no college.

The typical DI beneficiary is in late middle age — 70 percent are 50 or older, and 30 percent are 60 or older — and suffers from a severe mental, musculoskeletal, or other debilitating impairment.  Over half of beneficiaries have only a high-school education or less, and fewer than one-fifth have a four-year college degree.  Beneficiaries’ labor-market prospects are very poor, and their death rates are at least three times as high as the general population’s.

Claimants apply to SSA, which rejects people who are technically disqualified (chiefly because they lack insured status) and submits the remaining applications to each state’s disability determination service (DDS) for medical and vocational evaluation.  The agency’s adjudicators make their determination based on medical evidence and do not rely on the opinion of the applicant’s physician.  If denied at the DDS level, the applicant may appeal to an administrative law judge.  Ultimately, of about 1,000 initial applications, fewer than 400 are awarded benefits.  SSA regularly reviews beneficiaries to weed out those who have recovered, although Congress has stymied this effort by restricting funding.

Why Have the DI Rolls Grown?

The number of disabled workers has tripled since 1980 and doubled since 1995.  The bulk of that rise stems from four big demographic factors — overall population growth, the

aging of the baby boomers into their 50s and 60s (the peak ages for DI receipt), the rise in women’s labor force participation (which means more women now qualify for DI benefits), and the rise in Social Security’s full retirement age (which delays DI beneficiaries’ reclassification as retired workers).

Economic downturns lead some workers to seek DI benefits, but researchers conclude that a sour economy boosts applications by much more than actual awards.

The Social Security actuaries express the number of people receiving disability benefits using an “age- and sex-adjusted disability prevalence rate” that controls for these factors.  That rate rose from 3.1 percent of the insured population in 1980 to 3.5 percent in 1995 and 4.6 percent in 2014.  That increase is far less dramatic than the growth in the number of beneficiaries.

How Much Do People Receive in Benefits?

DI recipients receive modest cash benefits, based on their average earnings over their career.  The benefit formula is progressive:  higher earners receive a benefit that is larger in dollar terms but that represents a smaller fraction of their prior earnings.  After 24 months on the rolls, DI beneficiaries also become eligible for Medicare.

The average monthly DI benefit in December 2014 was just $1,165 (or less than $14,000 on an annual basis).  Only 0.6 percent of DI beneficiaries collected more than $2,500 a month.  A careful comparison of disabled workers’ benefits to their past earnings found that their benefits replaced about 55 percent to 60 percent of average lifelong earnings for a median worker, and about 50 percent to 55 percent of final earnings prior to the disability.  In a minority of cases, other family members may also be eligible to collect — most commonly, the minor children of the worker.

Most beneficiaries depend heavily on their DI benefits.  DI benefits make up the sole source of income for nearly one-third of non-institutionalized recipients and more than 75 percent of income for the large majority of recipients.  DI beneficiaries are also far likelier to be poor or near-poor than people who don’t collect DI.

Do DI Benefits Discourage Work?

Evidence suggests that few beneficiaries could earn more than very small amounts if they did not receive DI.

DI beneficiaries are permitted to work and may earn up to $1,090 a month in 2015 while collecting benefits.  Recipients may earn unlimited amounts for a short period without jeopardizing their benefits, while they test their ability to return to work.  And other program features, like extended Medicare eligibility, are designed to smooth their transition back to the labor market.  DI benefits are low, and one would expect beneficiaries to take advantage of these rules by trying to supplement their benefits with earnings if they are able to do so.

But only a minority ever work again after qualifying for DI.  Most applicants’ earnings fall sharply before they turn to DI.  Studies of “parking” (whereby beneficiaries deliberately hold their earnings just below the maximum allowed) and of converted beneficiaries (who, once they collect retirement, can earn unlimited amounts) show very limited work capacity.  Studies of rejected applicants show they struggle in the labor market — evidence that DI’s criteria for disability are, indeed, very strict.

For more on Social Security Disability Insurance, see our paper, “Social Security Disability Insurance Is Vital to Workers With Severe Impairments,” and our “Chart Book:  Disability Insurance,” .

Category: Insurance

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