November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

Mandatory SpendingOption 19

650 - Social Security

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

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays 0 -0.2 -0.4 -0.6 -0.9 -1.1 -1.4 -1.7 -2.1 -2.5 -2.2 -11.0

Note: This option would take effect in January 2015.

Under current law, people are eligible for Social Security Disability Insurance (DI) until they reach the full retirement age, which is currently 66 and is scheduled to increase gradually beginning in 2017 for those born in 1955 until it reaches 67 for workers born in 1960 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. In contrast, workers who at age 62 shift from being employed to receiving benefits from the DI program and who then move to Social Security’s retirement program at their full retirement age are not subject to a reduction. Instead, they receive approximately the same retirement benefits in each year that they would have received if they had enrolled directly in the retirement program 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 subsequent 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 if they became eligible for benefits 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 any Social Security benefits. 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, the age at which they claimed retirement benefits, and their life span.) Workers who begin receiving benefits before age 62 could continue to receive those benefits until they reach the full retirement age.

By 2023, this option would affect about 450,000 disabled worker beneficiaries. The option would reduce federal outlays by $11 billion between 2015 and 2023, the Congressional Budget Office estimates. Those savings would be the net result of a $53 billion reduction in DI outlays and a $42 billion increase in Social Security retirement benefits as people shifted from the DI program to the retirement program. By 2038, Social Security outlays (including both DI and retirement benefits) would be reduced by roughly 1 percent relative to 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 the Supplemental Security Income [SSI] program.)

A rationale for this option is that it eliminates the incentive for people who are applying for retirement benefits to apply for disability benefits at the same time in hopes of an outcome that advantages them financially. 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 to be too disabled to perform substantial work. In 2011, 8 percent of workers who became newly entitled to disability benefits were age 62 or older. 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, they also usually would have lost coverage by 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 the 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 who are judged unable to perform substantial work, some of those people could, in fact, work in a sufficiently supportive environment. If DI benefits were not available, some of them would work longer than they would under current law. On the other hand, the option would induce some people who were 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.)