Eliminate Eligibility for Starting Social Security Disability Benefits at Age 62 or Later

Under current law, people are eligible for Social Security Disability Insurance (DI) until they reach full retirement age—currently 66 years for workers who turn 62 in 2016. The full retirement age will rise gradually, starting at 66 and 2 months for workers born in 1955 (who will turn 62 in 2017) and eventually reaching 67 for people born in 1960 (who will turn 62 in 2022) or later. Workers who claim retirement benefits at age 62 rather than at their full retirement age receive lower benefits for as long as they live. By contrast, workers who claim DI benefits at age 62 are not subject to a reduction. Instead, they receive in each year approximately the same retirement benefits that they would have received had they claimed retired-worker benefits at their full retirement age.

That difference in benefits encourages some people between age 62 and their full retirement age to apply for DI at the same time that they apply for Social Security retirement benefits. If their DI application is approved, they receive higher benefits for the rest of their life than if they had applied only for retirement benefits. (Some people claim retirement benefits during the five-month waiting period that the DI program imposes on applicants. If they receive retirement benefits during the waiting period and then are approved for the DI program, their DI benefits and future retirement benefits are reduced a little. For example, if they receive retirement benefits for five months, their future DI and retirement benefits are generally reduced by 2 percent.)

Under this option, workers would not be allowed to apply for DI benefits after their 62nd birthday or to receive DI benefits for a qualifying disability beginning after that date, even if they applied before age 62. Under such a policy, individuals who would have become eligible for DI benefits at age 62 or later under current law would instead have to claim retirement benefits if they wanted to receive Social Security benefits based on their own earnings. Benefits for those people over their lifetime would be as much as 30 percent lower than the DI and retirement benefits they would receive under current law. (The actual reduction in lifetime benefits would depend on their year of birth and the age at which they claimed retirement benefits.)

In 2026, this option would affect about 700,000 people who would have received disability benefits under current law. The option would reduce federal outlays by $17 billion between 2018 and 2026, the Congressional Budget Office estimates. Those savings would be the net result of a $77 billion reduction in DI outlays and a $60 billion increase in Social Security retirement benefits as people shifted from the DI program to the retirement program. By 2046, Social Security outlays (including both DI and retirement benefits) would be reduced by about 1 percent from what they would be under current law. (Those estimates do not include any effects of this option on spending for other federal programs—such as Medicare, Medicaid, and Supplemental Security Income, or SSI—as well as spending on subsidies for health insurance purchased through the marketplaces established under the Affordable Care Act. Over the 10-year period, those effects would roughly offset. On one hand, disabled workers older than 62 would lose their eligibility for Medicare until age 65, thus reducing spending for Medicare. On the other hand, some disabled workers who lose DI and Medicare benefits under this option would become eligible for SSI, Medicaid, or health insurance subsidies, increasing spending for those programs.)

A rationale for this option is that it eliminates the incentive for people applying for retirement benefits to apply for disability benefits at the same time in hopes of securing a financial advantage. Moreover, workers who became disabled between age 62 and the full retirement age would still have access to Social Security retirement benefits, although those benefits would be less than the disability benefits available under current law.

An argument against this option is that it would substantially reduce the support available to older people who, under current law, would be judged too disabled to perform substantial work. Among the workers who began receiving disability benefits in 2014, about 8 percent were age 62 or older when they applied or became disabled. Those people would have received significantly lower benefits from Social Security if they had been ineligible for DI and had applied for retirement benefits instead. In addition, some people would have lost coverage through Medicare because that program’s benefits are generally not available to people under age 65, whereas most recipients of DI become entitled to Medicare benefits 24 months after their DI benefits begin.

The option’s net effect on older people’s participation in the labor force is unclear. On one hand, the option would induce some people to work longer than they will under current law: Although DI benefits are available only to people judged unable to perform substantial work, some people could find employment that would accommodate their disabilities. If DI benefits were not available, those people would work longer than they would under current law. On the other hand, the option would induce some people planning to work until age 62 or later to leave the labor force at age 61 so that they could apply for DI benefits. (The estimates presented here do not include any effects of changes in labor supply.)