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

Background

Under current law, people are eligible for Social Security Disability Insurance (DI) until they reach full retirement age—currently 66 years and 4 months for workers who turn 62 in 2018. The full retirement age is scheduled to rise gradually, starting at 66 years and 6 months for workers born in 1957 (who will turn 62 in 2019) and eventually reaching 67 for people born in 1960 or later (the oldest of whom will turn 62 in 2022). Workers who claim retirement benefits after turning 62 and before their full retirement age receive lower benefits for as long as they live. By contrast, workers who claim DI benefits before their full retirement age are not subject to a reduction in DI benefits. When those workers reach their full retirement age, their DI benefits are automatically converted to full retirement benefits, and the benefit amount remains the same.

That difference in benefits encourages some people between age 62 and their full retirement age to apply for DI when 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 monthly DI benefits and future retirement benefits are reduced a little. For example, if they receive retirement benefits for the full five months, their future DI and retirement benefits are generally reduced by 2 percent.)

Option

Under this option, workers would not be allowed to apply for DI benefits after their 62nd birthday nor to receive DI benefits for a qualifying disability that begins after that date. 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 are scheduled to 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.) Workers who would have become eligible for DI benefits based on a disability that began before age 62 would not be affected by this option.

Effects on the Budget

The option would reduce federal outlays for Social Security by $20 billion between 2020 and 2028, the Congressional Budget Office estimates. Based on data from the Social Security Administration, CBO estimates that, under current law, about 11 percent of new disability awards each year would be made to people who, after their 62nd birthday, applied for DI or experienced the onset of a qualifying disability. CBO estimates that in 2028 this option would affect about 730,000 people who would have received disability benefits under current law. Under the option, those people are projected to instead collect retirement benefits, which would be up to 30 percent lower than the disability benefits because they would be claiming benefits earlier than their full retirement age. CBO's estimates of the budgetary savings from the option reflect the net result of an $85 billion reduction in DI outlays and a $65 billion increase in Social Security retirement benefits as people shifted from the DI program to the retirement program. The estimate accounts for factors such as the distribution of average benefits by age, which depends on projected earnings, as well as the delay between disability onset and benefit receipt.

Budgetary savings from this option increase over time as more workers become affected by the new eligibility rules; however, the overall savings remain relatively small. By 2048, Social Security outlays (including both DI and retirement benefits) would be reduced by less than 1 percent from what they would be under current law.

Uncertainty about the effects of the option on other federal spending and on people's behavior could cause the savings from the option to be higher or lower than estimated. First, it is uncertain how the option would affect spending for other federal programs—such as Medicare, Medicaid, and Supplemental Security Income (SSI)—as well as spending on subsidies for health insurance purchased through marketplaces. Through 2028, those effects would reduce the savings slightly. On the 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. Uncertainty about those effects grows over time, in particular because of growing uncertainty about health care costs under different federal programs. The estimates presented here do not account for changes in spending for those other federal programs.

The second important source of uncertainty is how older people's participation in the labor force and the timing of benefit claiming would change in response to this option. On the one hand, the option would induce some people to work longer than they would 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 and claim benefits later 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 the effects of those factors, whose magnitudes are uncertain.

Other Effects

An argument 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 smaller 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. Those people would have received significantly lower benefits from Social Security if they had been ineligible for DI and had applied for retirement benefits before reaching the full retirement age. 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. In addition, DI beneficiaries typically have lower life expectancy than non-DI beneficiaries, resulting in their receiving benefits for fewer years. This option would further reduce the amount of benefits they receive over a lifetime.