We generally think of retirees and their survivors when we talk about Social Security, but that's not all that Social Security does. Some 4.7 million disabled workers who have worked long enough to qualify for Social Security benefits draw Disability Insurance. Those benefits come from a separate Disability Insurance trust fund that is part of our payroll tax.
So how would disability insurance fare in any change that converted Social Security to private retirement accounts? For an answer, we might look to three Texas counties that have had a private retirement system since the early 1980s. What has happened there indicates that disabled workers would fare better than they do now if we changed the system.
Until Congress closed a loophole in 1983, municipal governments could opt out of the Social Security system. In 1981 employees of Galveston County, Texas, voted to do just that and set up a private alternative. Neighboring Brazoria and Matagorda counties joined the same private plan in 1982, and today it has about 4,500 participants.
Contributions to the private plan are similar to Social Security payroll taxes. For example, each Galveston County employee is required to contribute 6.13% of income and the county contributes 7.65% for a total contribution of 13.78%. But the workers' benefits are quite different. Most of the 13.78% – 9.8 percentage points – goes to the employee's individual retirement account, which draws a fixed interest rate compounded daily. The rate has averaged about 6.5% over the years.
Another 1.18 percentage points pays for disability insurance, and the rest goes to a "self-completion" premium and a life insurance premium. With the "self-completion" premium the insurer creates a second retirement account if a worker becomes disabled, and continues to make deposits to the account as long as the worker remains on disability. That means the worker's retirement savings don't suffer during that period. The life insurance premium covers the employee in case of death. Workers continue to pay their Medicare payroll taxes and to receive Medicare benefits upon retirement.
The government's disability insurance program has the advantage of being indexed to inflation, while the private plan's is not. And workers who get cash benefits from the government program for 24 months qualify for Medicare coverage to pay for health care expenses.
But the private plan has its own advantages that the government's program doesn't. For example, disabled workers get 60 percent of their pay, up to a maximum of $5,000 per month, which is generally more than the benefit under government disability insurance. The private insurer also continues paying life insurance premiums for a death benefit that is three times the employee's annual salary, with a minimum of $50,000 and a maximum of $150,000. Social Security pays only a $255 death benefit, plus survivors benefits to certain individuals. And disabled workers are eligible to draw on money from their private retirement account if they need to.
All this adds up to a much better deal for disabled workers in the private plan than for those receiving Disability Insurance from Social Security. The private plan provided a few examples:
A 60-year-old low-income worker is likely to receive more than twice as much in monthly disability income from the private plan as from Social Security ($2,106 vs. $1,013), while a high-income worker is likely to receive 3.4 times as much ($6,304 vs. $1,869).
A single, 40-year-old middle-income worker receives $1,169 monthly under Social Security, and $1,753 if there is a dependent spouse, but that worker gets $2,201 a month under the private plan, regardless of marital status.
A low-income, 21-year-old disabled worker under the private plan gets $829 a month, compared to $2,479 for a high-income worker, but a 21-year-old disabled worker under Social Security gets nothing, regardless of income.
Disability insurance cost the federal government $39.9 billion in cash benefits in 1998 – but those working under the private plan cost the government nothing. While Congress considers reforming the Social Security system, perhaps it might want to consider reforming the Disability Insurance program to resemble the private plan. The Texas experience offers almost 20 years of proof that it can work. It provides better benefits, is easier to qualify for and costs the federal government nothing.
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The National Center for Policy Analysis is a public policy research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas, with an office in Washington, D.C.