Policy Basics: Social Security Disability Insurance
Social Security Disability Insurance provides earned benefits for workers who can no longer support themselves through work due to severe impairments.
August 1, 2016
Disability Insurance: A Crucial Part of Social Security
Disability Insurance (DI) is an integral part of Social Security. Workers contribute to DI and earn its protection in case they can no longer support themselves because of a severe and long-lasting disability. The Social Security Administration (SSA) administers DI.
In December 2015, nearly 9 million people received disabled worker benefits from Social Security. Payments also went to some of their family members: 140,000 spouses and 1.8 million children.
DI benefits are financed primarily by Social Security payroll tax contributions and totaled about $143 billion in 2015. That’s 4 percent of the federal budget and less than 1 percent of the gross domestic product (GDP). DI’s share of the payroll tax is now 1.185 percent of earnings up to Social Security’s taxable maximum, currently $118,500. (The tax rate will revert to 0.9 percent after 2018.) Benefits are paid from Social Security’s DI trust fund, which is legally separate from the much larger retirement and survivors trust fund. Under current projections, the DI trust fund will need replenishment in 2023.
Workers Earn DI Benefits Through Work
DI protects more than 150 million workers. To become eligible, beneficiaries must meet stringent criteria:
- Insured status. Beneficiaries must be both “fully insured,” meaning they have worked for at least one-fourth of their adult lives, and “disability insured,” meaning they 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. Beneficiaries’ physical or mental impairments must render them not just unable to do their own past work, but unable — considering age, education, and work experience — to do any other kind of substantial work. “Substantial work,” in 2016, means the inability to earn $1,130 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.
Disability Insurance provides modest but vital benefits to workers who can no longer support themselves on account of a severe and long-lasting medical impairment.
The large majority of DI beneficiaries have extensive work histories; the average beneficiary had 22 years of work experience and earned middle-class wages before becoming disabled. A typical DI beneficiary is in late middle age — about 75 percent are 50 or older, and nearly 35 percent are 60 or older — and suffers from a severe mental, musculoskeletal, or other debilitating impairment. Beneficiaries’ labor-market prospects are very poor, and their death rates are at least three times as high as the general population’s.
DI’s strict criteria mean SSA rejects the majority of DI applicants. The agency first screens for technical disqualifications (primarily failing to meet DI’s work history requirements) then submits the remaining applications to each state’s disability determination service (DDS) for medical and vocational evaluation. If denied at the DDS level, the applicant may appeal. Ultimately, of about 1,000 initial applications, fewer than 400 are awarded benefits. SSA regularly reviews beneficiaries to weed out those who have recovered.
Disability Insurance Provides a Lifeline in Hardship
DI beneficiaries 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 2015 was just $1,166 (or just under $14,000 annually). A careful comparison of disabled workers’ benefits to their past earnings found that their benefits replaced 50 percent to 55 percent of final earnings prior to the disability. In a minority of cases, other family members may also be eligible for benefits — most commonly, the minor children of the worker.
DI provides a lifeline for workers experiencing great hardship. Without it, the poverty rate among disabled workers would reach nearly 50 percent. Even with disability benefits, about one in five disabled workers is poor and many are near-poor.
DI Contains Significant Work Incentives
All DI beneficiaries can earn up to $1,130 a month (in 2016) as long as they are able and with no loss in benefits — which could double the income of a beneficiary receiving the average benefit of $1,165. Beneficiaries may earn unlimited amounts without jeopardizing their benefits while they test their ability to return to work during a nine-month trial work period and three-month grace period. 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.
However, evidence suggests that few beneficiaries could earn more than very small amounts if they did not receive DI. 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) 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.
DI Growth Has Leveled Off
The number of disability beneficiaries grew substantially in recent years, doubling 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 (because the risk of disability rises with age), the rise in women’s labor force participation (which means more women have earned DI’s protection), and the rise in Social Security’s full retirement age (which delays DI beneficiaries’ reclassification as retired workers). After adjusting for age and sex, the Social Security actuaries find that 3.5 percent of the insured population received benefits in 1995, rising to 4.5 percent in 2015. That increase is far less dramatic than the growth in the number of beneficiaries.
Economic downturns lead some workers to seek DI benefits, but researchers conclude that a sour economy boosts applications by much more than actual awards.
Though DI faces a long-term financing gap, its costs have stabilized as the economy continues to mend and baby boomers who receive DI move from Social Security’s disability program to its retirement program. Still, policymakers will have to revisit DI solvency within the next seven years — ideally as part of a comprehensive Social Security solvency package.
For more information on Social Security Disability Insurance, see our paper:
Social Security Disability Insurance Is Vital to Workers With Severe Impairments
and our Chart Book: