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The transition from disability to retirement is a scary one for Social Security recipients.
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This article was updated on April 25, 2017.
Most people think of Social Security as a retirement program, but disability benefits are also a huge part of Social Security. About 8.8 million Americans receive Social Security disability benefits, and another 1.8 million more dependents rely on the program to help make ends meet.
One of the most confusing things about Social Security disability is what happens after you reach retirement age. For many disabled Americans, shortened work histories mean that retirement benefits would ordinarily be unavailable or insufficient to meet their financial needs. But in figuring retirement benefits for the disabled, Social Security doesn't follow the same formula that it uses for most retirees.
The biggest concern that those receiving Social Security disability have about reaching full retirement age is that their benefit amounts might go down. The reason has to do with the way that disability and retirement benefits are calculated.
Specifically, in determining how much you receive in disability benefits, Social Security takes a look at your average lifetime earnings during the period before your disability began. It then uses a formula to come up with what's called the primary insurance amount, which is the base for determining how much you'll get from Social Security.
In many ways, the calculation of disability benefits closely resembles how Social Security determines retirement benefits. But the big difference is in the length of work history that gets considered. For more retirees, Social Security looks at a 35-year work history, and if you've worked less than that, then Social Security fills in the blanks with zeroes. That has the effect of bringing your average earnings down, and it therefore produces a lower primary insurance amount and reduces the benefits you'd receive.
Image source: Social Security Administration.
Obviously, for those who have been disabled for a long time, accumulating a 35-year work history is impossible. Many disability recipients therefore dread the possibility that their Social Security payments will go away or be greatly reduced when they qualify for retirement benefits.
The Social Security Administration recognizes that concern, and it takes into account the impact that disability has on income potential. Specifically, as the SSA spells out here, when you reach full retirement age, if you're still receiving disability benefits, then they automatically convert into retirement benefits. However, even though they're technically paid out of a different part of the Social Security program, the amount remains the same as it was before, based on the formulas that govern how much you received in disability benefits. In essence, for disability recipients, Social Security ignores the 35-year work history rule and only considers work history prior to disability.
In addition, even if you're not disabled at the time you retire, many individuals qualify for what the SSA calls a "disability freeze." By applying for the disability freeze, you can ask Social Security to ignore your periods of disability in their calculations for retirement and survivors' benefits. That in turn makes sure that you're not penalized for those zero-earnings years even if you're able to overcome your disability and return to work later in your career.
Image source: Social Security Administration.
Interestingly, there's a special rule that applies for those who become disabled and then apply for early retirement benefits under Social Security. If you became disabled, started collecting early retirement, and then had your disability application approved by the SSA, then you'll continue receiving your Social Security retirement payments, but you'll also get disability benefits that are enough to bring you to the full amount of the monthly payment you're entitled to receive. Moreover, when you reach full retirement age, you'll receive full retirement benefits as if you had never filed for early retirement benefits.
Note well, though, that this doesn't apply if you were already collecting early retirement benefits before you were disabled. In that case, you'll receive disability payments, but your retirement benefits at age 66 will go back to their reduced amount based on your having started collecting them early.
In general, most Americans receiving disability benefits won't face the huge financial challenges they fear once they reach full retirement age. Continuing to get payments at their previous level isn't always the perfect solution, but it's far better than losing benefits entirely.