A financial adviser in Minneapolis recently received a panicked call from one of his clients 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 is true, but it isn't as scary as it sounds.
Disability benefits end at full retirement 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, whom he called Mary, could stop the automatic conversion from disability to retirement benefits in order to engage in some creative strategies for claiming Social Security.
Mary's disability benefit, which she has 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 is $2,200.
The adviser reasoned that if Mary suspended her disability benefit before her full retirement age, at 66, she could file a restricted claim for spousal benefits only.
He thought that she could collect $1,100 per month in spousal benefits, while deferring her own retirement benefit until it reached the maximum amount. She would then switch to her own benefit at 70.
Sorry — it doesn't work that way.
Because Mary has been collecting Social Security disability benefits on her own earnings record, she isn't able to file a restricted claim for spousal benefits when she turns 66. That claiming strategy is available only to those who file for benefits for the first time at full retirement age.
ELIGIBLE VS. ENTITLED
In order to file a restricted claim for spousal benefits, individuals must be eligible for both a retirement benefit on their own record and for spousal benefit at full retirement age, according to Social Security Administration spokeswoman Dorothy Clark.
Eligible for a benefit means that an individual meets all the eligibility criteria but hasn't filed an application for the benefit, she said.
Entitled to a benefit means an individual meets all the eligibility criteria and has filed an application for the benefit, Ms. Clark said.
“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 about Mary.
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 clients who are forced to retire early due to a health problem and are at least 62 should apply for Social Security Disability at the same time they apply for the retirement benefit.
“If approved for disability, your disability checks will be larger than your retirement check,” Mr. Bruce wrote.
Disability checks are based on one's full retirement age benefit. Early-retirement benefits are reduced by up to 25% if an individual claims them before the normal retirement age of 66.
DISABILITY CLAIMS RISE
There has been a lot of attention paid to the steady increase in Social Security disability claims over the past five years. It seems that 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 that 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, executive vice president and chief investment officer for BMO Private Bank, theorizes that the large number of people on the disability rolls is one of the main reasons behind the low labor force participation rate.
“In the last 10 years, roughly 30% of Americans leaving the workforce were on Social Security disability,” Mr. Ablin wrote in a recent market analysis.
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, he wrote.
As of last month, 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 said. “While the disability program is worth preserving for those in need, Washington needs to stop the abuse.”
Mary Beth Franklin is a contributing editor at InvestmentNews.
