Work Ability and the Social Insurance Safety Net in the Years Prior to Retirement

Abstract

Questions persist about how well Social Security Disability Insurance, workers’ compensation, Supplemental Security Income, and veterans’ benefits protect people who are unable to work. This study examines disability benefit receipt, income, and poverty status for a sample of Americans as they age. The results underscore the precarious financial state of most people approaching traditional retirement age with disabilities. Fewer than half of people who meet our disability criteria ever receive disability benefits in their fifties or early sixties. Poverty rates for those who do are more than three times as high after benefit receipt than before disability onset.

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Introduction

Concerns about the effectiveness and cost of the disability safety net are becoming increasingly urgent as the nation ages. A patchwork of public programs provides income supports to people who are unable to work because of physical, cognitive, or emotional impairments, many of whom are in late midlife. Despite these benefits, a substantial portion of Americans with disabilities in their fifties and early sixties live in poverty (Congressional Budget Office 2004; Johnson and Mermin 2009), raising questions about how well these programs reach those in need and how well they serve those they reach. People can begin collecting Social Security retirement benefits at age 62, an important source of income for those with disabilities who lack access to other benefits. However, beneficiaries who begin collecting retirement benefits before the full retirement age receive permanently reduced monthly payments, threatening their income security in old age. These reductions are becoming more substantial as the Social Security full retirement age increases. Monthly payments are reduced by 20 percent for those who retired at age 62 before 2000 and faced a full retirement age of 65. Those who turn 62 in 2005 or later face a full retirement age of 66, and their benefits are reduced by 25 percent if they begin collecting at age 62. Once the full retirement age reaches 67 for those turning 62 in 2022, the penalty for collecting at age 62 will increase to 30 percent. The possibility that the full retirement age might be raised again to bolster Social Security’s finances, perhaps in combination with an increase in the early retirement age, raises the imperative to address the gaps in the disability safety net.

Despite evidence that the safety net does not work as well as it could, its costs will continue to grow in coming years as the boomers age, because many disability beneficiaries are in their fifties (Autor and Duggan 2006). The Social Security actuaries project that benefit payments by the Social Security Disability Insurance (DI) program, the nation’s largest disability program, will increase by more than 50 percent over the next nine years, and that the trust fund that finances these benefits will be depleted by 2014 (Social Security Trustees 2009). As costs mount, it becomes crucial that benefits are targeted to those who need them most.

This paper examines the economic consequences of disability in the years leading up to retirement. Using a multidimensional disability measure that combines information from a series of health and functional limitation indicators available in a nationally representative household survey of older Americans, we consider how disability rates increase as people age from their fifties into their early sixties. We then examine disability benefit receipt, including the source of disability payments, for adults age 51 to 64 with disabilities, with a special focus on how receipt varies by disability severity. Hazard models of time to disability receipt are estimated for different types of benefits. The final set of analyses compares income levels and poverty status before and after disability onset and benefit receipt.

The results underscore the precarious financial state of most people approaching traditional retirement age with disabilities. Disability rates roughly double as people age from 55 to 64. Fewer than half of people who meet our disability criteria ever receive disability benefits in their fifties or early sixties. Benefit receipt rates are much higher among those with the most severe disabilities, suggesting that benefits are targeted to those least able to work, but women are less likely than men to receive benefits, even when disability severity is controlled for. Many who receive disability benefits struggle financially, especially if they are not married. Poverty rates for people who collect disability benefits in their fifties and early sixties are more than three times as high after benefit receipt than before disability onset.

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