One-quarter of workers ages 51 to 55 develop work disabilities before age 62. Disabilities often force people to curtail their work hours, derailing retirement preparations. However, protections built into Social Security, including disability and spouse benefits and the system's tilt toward workers with low lifetime earnings, cushion the impact of midlife health problems. After other factors are controlled for, the onset of health-related work limitations between ages 51 and 61 reduces Social Security retirement benefits at ages 63 to 67 by only about 2 percent, much less than the impact on other retirement savings

Gordon Mermin

Richard W. Johnson

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Older Americans’Economic SecurityNumber 19, October 2008How Do DisabilitiesAffect FutureRetirement Benefits?Richard W. Johnson and Gordon B. T. MerminWorkers who develop health problems in their 50s and60s risk derailing their retirement preparations. Seriousmedical conditions raise out-of-pocket health care spend-ing and sometimes force people to retire early or cut backtheir work hours, leaving them with less money to savefor retirement. Early retirees must stretch their retire-ment savings further than those who retire later. SocialSecurity, however, provides an important retirementsafety net for Americans with work disabilities.Health ShocksHealth problems become increasingly common as work-ers approach traditional retirement ages. One-quarter of workers ages 51 to 55 in 1992 developed workdisabilities––defined as health problems that limit theamount or type of work they can perform––before age 62(Johnson, Mermin, and Murphy 2007). The risks are espe-cially high for workers with limited education. Nearlyone-third of workers who did not complete high schooldeveloped health problems before age 62, almost twicethe disability rate for college graduates. Women andAfrican Americans are more likely than men and otherracial groups to experience health shocks before age 62.Work disabilities often force people to curtail theirwork hours or leave the labor force earlier than planned.Consequently, disabilities tend to reduce Social Securityretirement benefits, which depend partly on how muchpeople earn over their lifetimes. Dealing with a disabilitycan also erode financial wealth, because people withhealth problems may have to dip into their retirementsavings to cover their medical bills or other living ex-penses, especially if they are unable to work.Health problems often shrink expected benefitsfrom traditional pension plans, which still cover aboutone-fifth of private sector workers and nearly all gov-ernment workers (Cushing-Daniels and Johnson 2008).Most traditional plans tie benefits to years of serviceand earnings received near the end of a person’s career.As a result, the value of future benefits tends to growrapidly just before retirement age. People forced to stopworking because of health problems can suffer substan-tial losses in pension plan benefits.Effects on Future Retirement BenefitsHealth problems have a significant effect on financialwealth and traditional pension benefits. After other fac-tors are controlled for, the onset of work disabilitiesbetween ages 51 and 61 reduces household wealth(including financial assets and the value of housing,other real estate, and businesses, but excluding SocialSecurity and traditional pension plans) by 8 percent atages 63 to 67 (figure 1). It lowers the value of lifetimebenefits from traditional pension plans by about 7 per-cent (among those with coverage).Health shocks between ages 51 and 61 only mod-estly reduce future Social Security retirement benefits.After earnings, education, and other factors are con-trolled for, the onset of health-related work limitationsreduces Social Security retirement benefits at ages 63 to67 by only about 2 percent. The impact is small partlybecause the system provides disability benefits to somewho can’t work because of a serious health problem.Social Security disability benefits are based on lifetimeearnings adjusted for the relatively short work lives ofpeople with disabilities. Unlike other beneficiaries,those receiving disability payments are not penalizedfor taking up benefits before the normal retirement age.Only about one-quarter of workers who reportwork disabilities in their 50s and early 60s ever receiveSocial Security disability benefits. The take-up rate islow because eligibility rules are strict and the applica-tion process is arduous, involving disability, earnings,and work history requirements.Other protections built into Social Security cushionthe impact of midlife health problems for those who donot qualify for disability benefits. The share of earningsthat the system replaces in retirement falls rapidly aslifetime earnings increase, boosting replacement ratesfor people with relatively short careers. Social Securityconsiders only the top 35 years of earnings, further pro-tecting people who are unable to work for more than 35 years. Additionally, people may collect benefitsbased on their spouses’ earnings histories instead oftheir own, if their spouses earned substantially morethan they did. Because of these protections, health prob-lems at age 51 and older reduce annual Social Securityretirement benefits by only about 3 percent for thosewho do not receive disability benefits.T H E  R E T I R E M E N T  P O L I C Y P R O G R A MUrban Institute • 2100 M Street, NW • Washington, DC 20037 • Phone: 202-833-7200 • http://www.urban.orgAn Uncertain FutureAlthough Social Security safeguards old-age benefits forthose who develop health problems late in their careers,people with disabilities continue to face economic chal-lenges. The many people with disabilities who fail toqualify for disability benefits often endure financialhardship before retirement benefits begin at age 62(CBO 2004). The growing backlog of disability claims,which doubled between 1996 and 2007, is stretchingwaiting times for benefits and deepening economic dis-tress (GAO 2007). The soaring costs of Social Security’sdisability program create additional uncertainty. Dis-ability benefit payouts already exceed tax revenue, andthe imbalance will worsen as the population ages (SocialSecurity Trustees 2008). The carefully crafted provisionsthat protect people with work disabilities should bemaintained in any revamped system.AcknowledgmentThis brief, funded through a generous grant from theRockefeller Foundation, is based on Johnson, Mermin,and Murphy (2007), which provides additional details.ReferencesCongressional Budget Office (CBO). 2004. Disability and Retirement: TheEarly Exit of Baby Boomers from the Labor Force. Washington, DC:Congressional Budget Office. http://www.cbo.gov/ftpdocs/60xx/doc6018/11-22-LaborForce.pdf. (Accessed October 6, 2008.)Cushing-Daniels, Brendan, and Richard W. Johnson. 2008.“Employer-Sponsored Pensions: A Primer.” Washington, DC: The Urban Institute. Retirement Policy Project, January.http://www.urban.org/retirement_policy/url.cfm?ID=901144.(Accessed October 6, 2008.)Government Accountability Office (GAO). 2007. “Social SecurityDisability: Better Planning, Management, and Evaluation CouldHelp Address Backlogs.” Washington, DC: U.S. GovernmentAccountability Office. http://www.gao.gov/new.items/d0840.pdf. (Accessed October 6, 2008.)Johnson, Richard W., Gordon B. T. Mermin, and Dan Murphy. 2007.“The Impact of Late-Career Health and Employment Shocks on Social Security and Pension Wealth.” Washington, DC: TheUrban Institute. Retirement Project Discussion Paper 07-07.http://www.urban.org/retirement_policy/url.cfm?ID=411591.(Accessed October 6, 2008.)Social Security Trustees. 2008. The 2008 Annual Report of the Board ofTrustees of the Federal Old-Age and Survivors Insurance and FederalDisability Insurance Trust Funds. Washington, DC: U.S. Govern-ment Printing Office. http://www.ssa.gov/OACT/TR/TR08/tr08.pdf. (Accessed October 6, 2008.)w w w . r e t i r e m e n t p o l i c y . o r gFIGURE 1. Impact of Late-Career Work Disabilities on Social Security Benefits, Traditional Pensions, and Household Wealth at Ages 63 to 67Source: Johnson, Mermin, and Murphy (2007).Note: Estimates show the effect of work disability onset between ages 51 and 61 for a sample of workers from the Health and Retirement Study, expressed as a percent-age of benefits or wealth at ages 63 to 67. The analysis controls for earnings and health at ages 51 to 55; education; gender; race and ethnicity; marital status; and joblayoffs. Work disabilities are defined as health problems that limit the type or amount of work that people can perform.–1.7%–7.3%–8.0%–9–8–7–6–5–4–3–2–10Percentage changeAnnual Social Security benefitsLifetime benefits fromtraditional pension plansHousehold wealth outside of SocialSecurity and traditional pension plansCopyright © October 2008. The Urban InstituteThe views expressed are those of the authors and do not necessarily reflect those of the Urban Institute, its board, its sponsors, or other authors in the series.Permission is granted for reproduction of this document, with attribution to the Urban Institute.

How Do Disabilities Affect Future Retirement Benefits?

Workers who develop health problems in their 50s and 60s risk derailing their retirement preparations. Serious medical conditions raise out-of-pocket health care spend-ing and sometimes force people to retire early or cut back their work hours, leaving them with less money to save for retirement. Early retirees must stretch their retire-ment savings further than those who retire later. Social Security, however, provides an important retirement safety net for Americans with work disabilities. Health Shocks Health problems become increasingly common as work-ers approach traditional retirement ages. One-quarter of workers ages 51 to 55 in 1992 developed work disabilities––defined as health problems that limit the amount or type of work they can perform––before age 6

Gordon B. T. Mermin

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How Do Disabilities Affect Future Retirement Benefits?

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