Applying for Disability benefits has a reputation as a time-consuming and inefficient process. Consequently, many people entering their 60s who could potentially qualify for disability benefits may opt to just elect for Social Security a couple of years early to avoid the hassle. However, this strategy has the potential to cost you a lot of money in the long run. Whether opting for disability would be the more remunerative strategy will depend on your age. A financial advisor could help you weigh the best options for your retirement goals.
Calculating Your Social Security Benefit Amount
The formula for calculating your Social Security benefits and your disability benefits is exactly the same right up until the very end. We’ll get into how it diverges in the next section, but for now, we’ll focus on the shared process.
The first step is calculating your average indexed monthly earnings (AIME). The Social Security Administration (SSA) will take your 35 highest-earning years into consideration. For each of those years, it will index your income for inflation and include it up to the taxable maximum (the point at which you stop paying Social Security taxes). For the tax year 2023, this point is $160,200 (up from $147,000 in 2022).
Next, the SSA will add up these totals and divide them to get your AIME. If you have more than 35 earning years, your lowest years will be excluded. If you have fewer than 35 earning years, the SSA will include a $0 in the calculation for every year you’re short.
The last step is to calculate your primary insurance amount (PIA) from your AIME. To calculate your PIA, the SSA will take a percentage of three different chunks of your AIME. The exact amount of these portions will differ slightly depending on the year you become disabled or turn 62. If you do either in 2021 the SSA will take 90% off your first $996, 32% of the amount between that and $6,002 and 15% of anything that remains. The total is your PIA.
When Does Disability Pay More Than Social Security?
Your PIA is the amount you’d receive if you were to qualify for disability benefits. It’s not that simple with Social Security benefits, however. While you’re technically eligible to begin taking Social Security benefits at age 62, you won’t receive your PIA until your full retirement age (FRA), which will fall somewhere between 66 and 67. At 62, your benefit amount would be only 70% of your PIA, increasing gradually until you reach your FRA.
|Full Retirement Age|
|Year of Birth||FRA|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
This means that between 62 and your FRA, your disability benefit would be higher. And there’s an additional benefit to taking disability: By electing for disability instead of Social Security, you allow your Social Security benefit to continue growing.
This disparity is even greater if you happen to become disabled after you turn, say, 63. The reason here is that your Social Security benefits will be determined by your PIA for the year you turn 62, while your disability benefits would be calculated with your PIA for the next year. Provided your AIME is the same or higher, then your PIA for the later year will be higher.
When Does Social Security Pay More Than Disability?
The reverse of the above situation is true if you are between your FRA and age 70. After you reach your FRA, your Social Security benefit amount increases by 0.8% for every month you hold off on claiming your benefits. This continues until you reach 70, at which point your benefit reaches its maximum. In this situation, your monthly Social Security benefit would be larger than your monthly disability benefit.
SSI vs. SSDI: Which Pays More?
There is also a comparison of payments from the different types of disability programs that the Social Security Administration manages. These programs are for direct disability benefits (SSDI) and supplemental income benefits (SSI). The SSDI payments are for those who are disabled and need income assistance. The SSI benefits are paid out to low-income, low-asset adults and disabled children.
If you’re comparing these two types of Social Security benefits, then you should know that typically the SSDI benefits pay more. In fact, disability in this scenario is, on average, more than double the benefits you would receive from SSI benefits. However, every individual situation may have varying results.
The Bottom Line
It’s easy to get lost in all the different acronyms and calculations that come along with Social Security benefits. However, if you’re wondering if disability would pay more, just ask yourself where you are relative to your full retirement age.
If you’re under it, disability will be higher. If you’re above it, Social Security will be higher. Just like with any other Social Security issue, the way you can optimize your experience is by thoroughly understanding all of your options.
Tips for Navigating Social Security
- A financial advisor can help you account for the various sources of retirement income, including Social Security benefits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re applying for Social Security disability benefits, you’ll need to fill out form SSA-827. This provides your consent for the SSA and Disability Determination Services (DDS) to view your medical records.
- Dealing with a disability, either temporary or permanent, is hard enough without considering the financial impact. Having an emergency fund in place for unpredictable things like this can be a huge relief.
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