When eligibility for retirement and disability benefits overlaps

Social Security disability benefits are designed to provide income for people who cannot work because of a medical condition that is expected to last at least a year or result in death. Applications for disability benefits usually increase during times of high unemployment, but it can be a long and arduous process and often results in a denied claim.

Social Security retirement benefits, on the other hand, are automatically available as early as age 62 for people who have worked long enough — at least 10 years — to qualify for benefits. But most individuals who file for retirement benefits before their full retirement age (FRA) receive a smaller benefit for the rest of their lives because they claimed benefits early.

When individuals receiving disability benefits reach age 62, they also become eligible for retirement benefits and can elect which benefit to receive. These beneficiaries usually choose to continue receiving disability benefits because the Social Security Administration does not reduce disability payments based on age the way it reduces retirement benefits. At full retirement age, Social Security Disability Insurance benefits automatically convert to retirement benefits, but the monthly amount remains the same.

However, some disability beneficiaries can receive higher payments over their lifetimes by converting to reduced retirement benefits at 62, according to a new report from the Social Security Administration’s office of the Inspector General.

Reduced retirement benefits may be higher for some disability beneficiaries who are receiving workers’ compensation or public disability payments or who have family members who receive benefits on their earnings record, according to the OIG report.

“When disability beneficiaries elect to receive reduced retirement benefits, the reduction is not permanent as it is for non-disability beneficiaries,” the report noted. “Specifically, for beneficiaries who are entitled to both disability and retirement benefits and elected to received reduced retirement benefits, section 202(q)(7)(F) requires that SSA pay a higher benefit amount when the beneficiaries reach FRA.”

Congress added this provision as part of the Social Security Amendments of 1965. At the time, Medicare coverage was not available to disability beneficiaries’ spouses. The provision allowed disability beneficiaries to switch to reduced retirement benefits so their spouses could receive Medicare coverage without affecting the beneficiaries’ future retirement benefits by allowing for an unreduced payment when they reach FRA.

 A spouse’s Medicare eligibility no longer depends on whether the wage earner is receiving disability or retirement benefits. The OIG report argued that the outdated provision allowing disability beneficiaries to convert to reduced retirement benefits at 62 and later receive a boost in benefits at full retirement age should be eliminated because it gives them a financial advantage over non-disability beneficiaries.

Although the OIG report argued for the elimination of the provision, it may have unintentionally provided a road map for dually eligible beneficiaries who could benefit from this conversion strategy.

The OIG report identified more than 32,000 disability beneficiaries who as of September 2019 had elected to receive reduced retirement benefits at 62 and were entitled to full retirement benefits at full retirement age. From that list, OIG auditors reviewed a random sample of 100 beneficiaries in that population and determined that 89 of them had received a financial advantage from the provision that restored their full benefits at full retirement age.

Most of them — 70 of the 89 — increased their benefits before full retirement age by converting from disability to reduced retirement benefits because they were receiving workers’ compensation or public disability payments. SSA reduces disability benefits for certain beneficiaries who receive workers’ compensation or public disability payments. This reduction does not apply to retirement benefits. The OIG estimated that these 70 beneficiaries will receive more than $3.4 million in additional payments from FRA through the end of their lives.

Eleven beneficiaries increased their total payments for their families by converting from disability to reduced retirement benefits because eligible spouses and children usually receive higher payments when the wage earner is receiving retirement benefits. These 11 beneficiaries will receive more than $544,000 in additional payments from FRA through the end of their lives.

Eight beneficiaries increased their benefits by converting from disability to reduced retirement benefits because they returned to work. Beneficiaries who receive reduced retirement benefits can earn more than those who receive disability benefits.

The OIG report recommended that SSA change the provision to eliminate the financial advantage it gives to certain disability beneficiaries.

“We estimate this provision will result in approximately 29,000 beneficiaries receiving almost $1.4 billion in additional lifetime benefits,” the report said. “As long as the provision remains in place, more beneficiaries will become eligible for the same financial advantage, compounding the effect on the SSA Trust Fund.”

In response, the SSA said it disagreed with the OIG recommendation and deferred to Congress to determine whether a legislative change is necessary.

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