Plenty of confusion over the interplay between disability and retirement benefits.
A financial adviser in Minneapolis received a panicked call from one of his clients recently asking what would happen to her disability benefits once she reached full retirement age. She had heard that Social Security disability benefits end at full retirement age.
That's true, but it's not as scary as it sounds. Disability benefits end at full retirement age, currently age 66, but are automatically converted to retirement benefits. The monthly benefits continue in the same amount.
The conversation prompted another question. The adviser wondered if the client, who he called Mary, could stop the automatic conversion from disability to retirement benefits so she engage in some creative Social Security claiming strategies.
Mary's disability benefit, which she had been collecting for several years due to a medical condition that rendered her unable to work, is $1,800. Her husband's retirement benefit at full retirement age would be $2,200. The adviser reasoned that if Mary suspended her benefit before she reached her full retirement age, at 66 she could file a restricted claim for spousal benefits only allowing her to collect half of her husband's benefit ($1,100), and defer collecting her own retirement benefit until it was worth the maximum amount at age 70.
Sorry. It doesn't work that way. Because Mary has been collecting Social Security disability benefits on her own earnings record, she is not able to file a restricted claim for only spousal benefits when she turns 66. That claiming strategy is available only to someone who is filing for benefits for the first time at full retirement age.
Dorothy Clark, a Social Security Administration spokesman, explained that to file a restricted claim for spousal benefits only, you must be eligible for both a retirement benefit on your own record and for a spousal benefit at full retirement age.
“Eligible” for a benefit means that you meet all of the eligibility criteria, but have not filed an application for the benefit,” Ms. Clark explained. “Entitled” to a benefit means that you meet all of the eligibility criteria and have filed an application for the benefit.
“Because she is now full retirement age and is entitled to her own retirement benefits, that entitlement negates her choice to a restricted claim for spouse's benefit only,” Ms. Clark said.
Robert Bruce, a 30-plus year veteran of the Social Security Administration and author of the self-published book Social Security Inside Out (SocialSecurityInsideOut.com), recommends that if you are forced to retire early due to a health problem and are at least age 62, you should apply for Social Security Disability at the same time you apply for Retirement benefit.
“If approved for disability, your disability checks will be larger than your retirement check,” Mr. Bruce wrote. Disability checks are based on your full retirement age benefit. Early retirement benefits are reduced by up to 25% if you claim them before your normal retirement age of 66.
There's been a lot of attention paid to the steady increase in Social Security disability claims over the past five years. It seems when the economy sours, more people claim—and qualify for -- disability benefits.
Social Security pays disability benefits to workers--and to certain members of their family-- assuming the individual has worked long enough in jobs covered by FICA payroll taxes and has a medical condition that prevents him or her from working for at least a year.
Jack Ablin, Chief Investment Officer for BMO, theorizes that the large number of people on the disability roles is one of the main reasons behind the current labor force participation rate which is one of the lowest in U.S. history.
“Most of the problem lies with the number of Americans dropping out” of the labor force, Mr. Ablin wrote in a recent market analysis. “In the last 10 years, roughly 30 percent of Americans leaving the workforce were on Social Security Disability.”
Because enrollees stand to lose their benefits, including early access to Medicare, should they decide to take on full time employment, there is an enormous incentive to stay on the sidelines, Mr. Ablin explained.
As of March 2013, nearly 9 million workers were collecting disability benefits. Add another 2 million people when you include benefits for their dependent spouses and children. After two years, disabled workers qualify for early access to Medicare.
“The explosion of the entitlement rolls not only depletes those programs, but also hits potential economic growth,” Mr. Ablin added. “While the Disability program is worth preserving for those in need, Washington needs to stop the abuse.”
