Social Security Disability vs. Retirement Benefits

About one in six people in the United States collect some form of Social Security benefits each month, a total of nearly 60 million recipients. But, a Social Security card is more than a form of identification.

We often think of Social Security as a well-known retirement benefit, but Social Security is an expansive program with many types of benefits for people of nearly all ages. Choosing the right type of benefit — if you’re eligible — can make a big difference in your monthly benefit from Social Security, your overall retirement plan and your planned retirement income.

What Are Social Security Benefits?

The Social Security program that we know today originally began in 1935, when the Social Security act was signed into law by President Franklin D. Roosevelt as part of the Second New Deal.  The primary goal of the Act was to provide financial aid for children, the unemployed, and the elderly. At the time the legislation was passed, the country was still only midway into the Great Depression, and the Social Security Act was accompanied by several other measures designed to jumpstart the economy and provide financial relief to those in need.

Social Security benefits include the following:

• Social Security Disability Income (SSDI) benefits
• Survivor benefits
• Social Security benefits for children
• Supplemental Security Income (SSI) benefits
• Social Security retirement benefits

Because Social Security can span such a wide range of people and benefits, you must be open to accessing these benefits when needed. At the same time, you must understand that Social Security is just one retirement benefit which you can access. There was a time when everyone had a pension (or they could live comfortably on their Social Security.) That’s not necessarily the case anymore.

What Are Social Security Retirement Benefits?

Over 70% of the people receiving Social Security benefits are receiving retirement benefits. The benefit is only available for those who are at least 62 years of age. Eligibility for benefits requires that the recipient has earned at least 40 work credits, with four credits available for each year worked. In 2015, the method of calculating eligibility for work credits changed, assigning one work credit for every $1,220 in earnings as opposed to the amount of time worked.

Social Security benefits can be affected by your age, when you begin to draw benefits, and the average of your 35 highest-earning working years. There’s also a cap on how much can be received as a benefit payment. Partial benefits can be paid at age 62, with full benefits available at age 65 to 67, depending on your birth year. In most cases, retirees benefit most from waiting until they can receive a full benefit at age 70 because the amount of the benefit increases by up to 8% each year between age 62 and age 70. However, there can be exceptions to this rule and households with retirees who retire at different times should research their options carefully. The difference can mean tens or even hundreds of thousands of dollars in Social Security benefits that you may or may not receive as a household, depending on your choice.

Workers who become disabled later in life may also have the option of filing for disability benefits as opposed to retirement payments

Similarities

Some of Social Security’s benefits are only available in select circumstances, such as the benefits available to a child whose parent is deceased, but there’s often confusion regarding disability benefits and retirement payments, specifically which one to choose if you are at or near retirement age and become unable to work. You should remember that some people may end up in a situation where they are no longer able to work before retirement age. In those cases, you need to work with a financial professional to determine what you can do to balance use of SSDI benefits and retirement funds.

Both Disability and Retirement Pay Are Funded by Contributions Made by Payroll Deductions

Social Security disability and retirement checks are funded by a FICA tax of 15.3% of the worker’s gross earnings, which includes contributions for both Social Security and Medicare.  The Social Security withholding applies to earnings below $128,400 in 2018. Earnings above this amount are not subject to Social Security withholding but are still subject to Medicare withholding, approximately 3% of gross earnings. FICA taxes are split between the employee and employer.  Self-employed individuals are responsible for the entire 15.3%, subject to their income.

Both Social Security Disability and Retirement Plans Use Work Credits to Determine Eligibility

Both Social Security disability and retirement plans use work credits to determine eligibility.  In most cases, a total of 40 work credits are required for full benefits. For disability benefits, 20 of the 40 work credits must be earned in the 10 years preceding your disability. For younger workers, the work credits requirement may be lowered. Up to four work credits are available for each year in the workforce. Until 2015, the system worked off a simple calendar system. Beginning in 2015, work credits are earned based on earned wages, with a minimum amount of earnings required to earn a work credit.

Both Disability and Retirement Pay Can Provide Income When 62 Years of Age or Older and Unable to Work Due to a Disability

Assuming you have enough work credits earned based on your age, disability benefits are available long before retirement age.  Disabled workers under age 24, for example, only need six work credits earned in the three years prior to their disability. Social Security disability benefits are available up until the full age of retirement.

Social Security retirement offers full benefits available at age 65 to 67 depending on the year in which you were born, and partial benefits available beginning at age 62. Retirees have the option of waiting until age 70 to draw Social Security, allowing their monthly benefit to grow by about 8% each year and providing a higher monthly income than if they took benefits when first eligible for full benefits.

A third option, Supplemental Security Income (SSI), is available to low-income individuals who have a disability and haven’t earned sufficient work credits to qualify for SSDI, including those who have never worked. Unlike Social Security disability and/or retirement, SSI is not funded by payroll deductions. Instead, the SSI benefit is funded by general fund taxes.

Differences

Disability requires meeting strictly defined criteria, retirement relies on work credits and age

Social Security Disability Benefits and Retirement Rely on Different Guidelines for Work Credits to Determine Eligibility

However, if the required amount of work credits has been met, eligibility for the two benefits begins to diverge. To qualify for disability benefits, applicants must pass a strict set of guidelines to demonstrate that they are unable to work in their chosen field and are also unable to work in other areas. Generally, the hurdles to qualify for Social Security disability benefits become smaller for older applicants. This creates some important considerations for workers over age 62 who become disabled. Technically, disabled workers over age 62 may be able to qualify for either Social Security disability or Social Security retirement. It isn’t possible to collect both at the same time, but one may be advantageous over the other.

Benefit Amounts Can Differ Depending on Age

For workers over age 62 and below the age of full retirement who become disabled, it’s usually advisable to apply for Social Security disability benefits.  At age 62, Social Security retirement will only pay 75% of the full benefit. By comparison, Social Security disability benefits pay 100% of the full retirement benefit – even at age 62.  Additionally, someone over age 62 receiving Social Security disability benefits can still defer their Social Security retirement benefits until they reach full retirement age, thereby ensuring that their Social Security retirement benefits will not be reduced because they began drawing disability benefits prior to full retirement age.

Adjustments Are Not Consistent

When you are a member of a retirement system, they often increase your benefits with cost-of-living increases, etc. You can even draw more money from private retirement accounts. When you are on Social Security, changes will be made from year-to-year, but they are not consistent. This means that they are not all that predictable, but you have some measure of control when managing your own retirement accounts.

Final Thoughts

Social Security can provide benefits for people of nearly all ages, but often it’s when you’re at retirement age that your choices have the most financial impact on both current income and future income. Waiting an extra few years until you reach age 70 — and earning income along the way — can create a dramatic increase in your Social Security benefit for retirement, an important consideration now that we're living longer. You can use a retirement calculator to learn more about setting goals and planning for the future.

Remember, too, that you can save money by enrolling in Medicare so that you’re not overpaying for medical, dental or vision coverage.

Moreover, many retirees might do well to build other forms of retirement savings through:

• Stocks
• ETFs
• IRA accounts
• Precious metals, etc.

Another important consideration is when to take Social Security disability benefits if you're over age 62 and can qualify for either Social Security disability benefits or retirement. Many people who may qualify for disability benefits instead choose retirement because they’ve heard that qualifying for disability benefits is difficult or because they feel a stigma may be attached to receiving disability benefits.  Qualifying for disability benefits when you’re older is typically easier, and the difference and the monthly benefit can be as high as 25%, making it an option that’s worth exploring for disabled working-age seniors. You should also consider how death benefits are paid because retirement money is often a lifeblood for spouses or dependents.

At the end of the day, your retirement goals can be reached in many different ways. You must also consider tax withholding, cost of living, interest rates and where you want to go on your retirement journey.

You can speak with an investment advisor if you need more information, or you can research with Benzinga at any time.

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