Being a traffic cop at the intersection of disability and Social Security benefits

Much of the financial planning community has embraced Social Security claiming strategies as an integral part of retirement income planning, but Social Security disability benefits remain a mystery to many.
Based on the contents of my mailbag, it seems there is an increased appetite for information about Social Security disability benefits. Specifically, advisers want to know what happens when clients who are receiving Social Security disability benefits reach full retirement age.
The short answer is disability benefits automatically convert to retirement benefits at age 66. The monthly amount remains the same.
Heightened interest in this topic prompted Joe Elsasser, creator of the Social Security Timing software program that helps advisers identify optimal Social Security claiming strategies, to host a recent webcast that explored planning opportunities for disabled clients and their families.
(More: The new and improved Social Security statements)
Mr. Elsasser noted that the subject of disability benefits is complicated and beyond the scope of most financial planners’ expertise. And, at the moment, he said, “No Social Security software tools can account for disability benefits.”
But, he added, it can create a great opportunity for advisers to reach out to attorneys who specialize in Social Security disability benefits as a way of building a referral network. It will establish a ready resource for any clients who might need guidance on applying for disability benefits and possibly prompt reciprocal referrals from attorneys whose clients might need financial planning help.
“It’s a fantastic way to reach out of other centers of influence in your community,” he said.
Unlike eligibility for Social Security retirement benefits which is automatic based on age, approval for disability benefits is granted on a case-by-case basis depending on health status.
An adult is considered disabled if he or she is “unable to engage is any substantial gainful activity because of a medically determinable physical or mental impairment.” The impairment must be expected to result in death or last for at least 12 months. There is a multi-tiered appeals process for disability claims that are initially denied.
To be eligible for disability benefits that are based on average lifetime earnings, a worker must be younger than full retirement age and be both fully and recently insured. For most workers, that means they must have paid payroll taxes for at least 10 years and have earned at least half of those quarters in the past 10 years. (More lenient work requirements apply to younger workers). There is a five-month waiting period before disability benefits can begin.
What many financial advisers do not realize is that when a client is approved for disability benefits, the client’s family may also qualify for benefits. The Social Security Administration is expected to pay nearly $140 billion in disability benefits to nearly 11 million Americans this year, including about 9 million disabled workers and 2 million spouses and children.
When a client is collecting Social Security disability benefits, a spouse age 62 or older can collect spousal benefits, which are reduced for early claiming if received before their full retirement age. So can a spouse of any age who is caring for the disabled worker’s minor dependent children under age 16. Dependent children can collect benefits up to age 18, or age 19 if they are still in high school. So can unmarried children age 18 or older who has a disability that started before age 22. But total benefits cannot exceed the family maximum limit.
Normally, disability benefits automatically convert to retirement benefits at full retirement age. The beneficiary does not need to apply or notify SSA for the conversion to occur. But not all beneficiaries want their retirement benefits at that time.
“Prior to conversion, you can call or write the Social Security Administration and ask them to suspend your benefits at full retirement age,” Mr. Elsasser said.
That would allow the disabled worker to earn delayed retirement credits worth 8% per year for every year benefits are postponed beyond full retirement age up to age 70. Suspension would not affect benefits received by family members. But it would increase the ultimate retirement benefit by up to 32% and result in a larger survivor benefit for the remaining spouse.
You’re going to be hearing a lot about Social Security disability benefits in the coming year. The Disability Trust Fund is expected to run out of money in 2016, resulting in a 20% cut in benefits unless Congress acts.
Of the 6.2% in payroll taxes paid by both workers and employers on up to $117,000 of earnings in 2014, 0.9% goes to the disability Insurance trust fund and the rest goes to pay retirement and survivor benefits. An additional 1.45% of payroll taxes on all earnings funds Medicare.
One trust fund cannot borrow or receive reallocated payroll taxes from the other without Congressional action. Congress has approved a reallocation 11 times in the past. Stay tuned to see how the new Congress handles this challenge.
(Questions about Social Security? Find the answers in my e-book.)