DISABILITY: ECONOMIC COSTS AND INSURANCE PROTECTION

Chronic conditions reduce economic activities, and the consequence may be a reduction in income and in social networking efforts and opportunities. When these chronic conditions are a cause of the inability to perform one or more necessary occupational tasks, work hours and earnings are likely to be limited, and wage growth over a person's lifetime will be less than if work were not limited. The cost of disabling conditions to the older population is due to the effect of these conditions on earnings, as well as on the timing of earlier withdrawal from the labor force. Further, the economic constraints imposed by disability reduce the probability of medical intervention. Reductions in social contact that are often associated with chronic conditions may shut off the possibilities of nonpaid assistance and make the social rewards of beneficial lifestyle changes that could mitigate the risk and progress of these conditions less evident.

The economics of disability

By the broadest definitions of disability—being limited in an activity due to a chronic health condition—about 15 percent of the noninstitutionalized population in the United States is disabled. The disabled are on average less economically well off than the nondisabled. La-Plante et al. report that 27.3 percent of persons in families with incomes below $10,000 report some activity limitation, compared to only 9 percent of those in families with incomes of $35,000 or more. If disability is defined as the inability to perform a major life activity, the respective percentages are 10.6 and 1.8. The relationship between lower economic status and having at least one chronic condition is found at all ages, over time, and across nations Older individuals with at least one of the major chronic conditions (heart disease, depression, asthma, hearing loss, arthritis, diabetes) have lower incomes and fewer assets than comparably aged individuals without those conditions. (Alzheimer's disease, more highly correlated with age than other conditions, stands alone as a chronic condition whose incidence is not correlated with economic status.)

There are two possible, not mutually exclusive, explanations for the persistent relationship between disability and economic status. Chronic conditions that occur independently of economic status are likely to lead to lower income due to subsequent reductions in work and earnings, and the higher out-of-pocket costs for medical and physical care. Persons age sixteen to sixty-four with a work-related disability less likely than the nondisabled to be either working or looking for work. Those who work are more likely to work part-time and, even if they do work full-time, to have lower earnings (Kaye). On the other hand, low income may lead to a higher incidence of chronic conditions because limited resources reduce access to medical care, in part because of the inability to pay the out-of-pocket costs of care. Even preventive lifestyle changes (e.g., weight and cholesterol management through better diet, regular exercise regime, smoking cessation program) are less likely because these require resources and social support.

Chronic and Disabling Conditions, published by the National Academy for an Aging Society as part of its Public Policy and Aging Report series, documents three important aspects of chronic conditions that influence the relationship between disability and economic status later in life.

• Early life chronic conditions have subsequent effects on economic status because young persons with chronic conditions miss more school than their healthy peers, thus slowing their educational achievements and consuming parental resources that might otherwise be spent on children's education.
• The most prevalent chronic conditions among the older population (e.g., depression, asthma, hearing loss, and heart disease) can be managed effectively with medication, therapy, and changes in lifestyle. However, the lower social and economic support associated with these chronic conditions limits the ability to obtain appropriate treatment, and the earlier the onset, the more likely are they to slow the accumulation of financial resources to pay for medical care and necessary lifestyle changes.
• Caregiving at home disrupts employment and leisure activities of family members. It is estimated that U.S. businesses lose $33 billion a year due to lost productivity and absenteeism of caregivers. Adding to the time commitments of care are the out-of-pocket costs for care.

Work withdrawal by older disabled workers

Workforce withdrawal later in life due to a work-limiting disability may have different consequences for economic well-being in retirement than does retirement at the end of a relatively healthy work life. A chronic condition that had limited job opportunities and work performance for a large share of an individual's work life will lower earnings and savings, and increase probability of employment in a job not covered by a pension or health benefits. Thus individuals with lifelong disabilities are more likely to enter retirement with more limited resources compared to their nondisabled peers, and to be less financially protected against the unexpected risks in the retirement period. They are also more likely to leave the workforce earlier than their nondisabled peers. However, Haveman et al. (1999) show that individuals who first received Social Security disabled-workers benefits at age fifty-five or older have lower family income and assets than do their nondisabled peers, even as the latter entered the retirement. This difference is a consequence of their less favorable work histories and their consequent lower earnings-related retirement benefits, their lower likelihood of retirement employment, and the lower probability of being married (and having a second earner or pensioner).

Some disabled persons surely have such severe work limitations that they have few labor market "choices." However, for the majority of older workers with work-limiting conditions, the decision to continue paid labor force work will be determined in part by the financial advantage of continuing the work they are able to do, compared to receiving private or public benefits for which they are eligible. (For a fuller discussion on the labor market choice of men with disabilities, see Haveman et al. [1991], Haveman and Wolfe [1984], Bound [1989], and Leonard [1986].) These disability benefits may be linked to retirement benefits (e.g., from Social Security or employer-provided pensions). A work-related disability must be substantiated, however, and benefits may be received at an earlier age than allowed for receipt of retirement benefits. In making this choice, disabled workers assess the future trajectory of labor market opportunities and earnings, and compare this with the trajectory of income flows if they receive disability benefits. The lower market earnings because of a work-limiting disability and disability benefits that may be structured to reduce the penalty for "early" retirement (often coupled with coverage by employer-provided or public-sector health plans) are theorized to encourage work withdrawal. There is evidence that for some older disabled workers, disability benefits do encourage early retirement (Haveman et al. 1988; Berkowitz).

Disability insurance: general policy features

Because chronic or sudden-onset health conditions are known to limit or prevent paid work, public and private disability programs are in place to provide income for persons who cannot work. Such programs typically provide benefits for disabled persons of all ages, but have an eligibility cap at an age when individuals are expected to rely on retirement-related savings and transfer programs.

Disability insurance that compensates for the loss in earnings due to a work-limiting disability may be obtained through the employer or through the private purchase of insurance, and is provided by the Social Security Administration to workers in covered employment. The eligibility of a person for disability payments depends on how the policy defines a compensable disability, whether there is a waiting period (or elimination period), and the benefit period.

A policy or program typically defines a compensable disability as total or partial and by the type of occupation whose performance the disability prevents. Benefits may be paid only after a waiting (or elimination) period, and the duration of payments may be limited. Work-related disability programs pay benefits based on prior wages, although the calculation of replacement varies across programs.

Disability is typically defined as the inability to perform occupational duties; that occupation may be specified as the insured's own occupation at the time of disablement, any occupation for which the insured is trained, or any gainful occupation. This distinction is critical to whether a person unable to perform his or her usual occupation is expected to seek other employment. The distinction between total and partial disability is important to the payment amount when a person is deemed eligible for disability payments. Total disability will qualify an individual for full payments, whereas partial disability, or the inability to perform one or more important tasks of a person's occupation, leads to a partial payment of disability benefits.

Policies typically have waiting periods during which benefits are not paid. A longer period reduces the costs of policies to the individual, employer, and (in the case of Social Security) society. It is also expected that employed individuals will have access to sick leave or other short-term disability benefits, or their own savings. In addition, policies limit the duration of benefits to either a specific number of years or to an age at which retirement benefits are expected to be accessed. Finally, disability programs, even those that require documentation that the disability is total and expected to be permanent, may require some type of rehabilitation or retraining.

The cost of disability policies to individuals and employers has risen substantially in recent years due to an increase in the number of claims, in part the result of the recognition that mental health and alcohol and drug problems are legitimate causes of work disability. This has changed the distribution of reported disabilities among disability income recipients and has led to changes in policy provisions that are likely to make disability policies more restrictive and more difficult for individuals to obtain.

Social Security disability insurance benefits

In 1956 legislation added disability insurance (SSDI) to the U.S. Social Security program. Benefits are calculated approximately like retired worker benefits, based upon average indexed monthly earnings over a period defined by the individual's year of disablement. Currently about 5 million individuals are SSDI beneficiaries, receiving an average of about $787 per month.

To be eligible for disability benefits, in general a person needs to have been employed in covered work for forty quarters, as is the case for retired-worker benefits. However, for disability benefits, twenty of those quarters must be earned in the 10-year period ending in the year in which the person became disabled, and younger workers may qualify with fewer quarters. Disability applications are considered up to age sixty-five, after which applicants are considered for retired-worker benefits. Persons who received disability benefits prior to age sixty-five are administratively converted to retired-worker status with no change in benefit amount. They are then subject to retired-worker benefit rules.

Eligibility for SSDI benefits requires total disablement—the inability to work either in the job performed prior to disability or in any other job the individual would be able to perform given his or her marketable skills. Disablement is determined either by a person having a listed medical condition that is considered so severe that it leads to automatic determination of eligibility or by a person's nonlisted condition being determined to be so severe as to prohibit employment in any work for which he or she is qualified. The disability must be expected to last at least one year. While disablement typically is medically determined, earnings of more the $780 a month (in 2002, adjusted annually by the average rise in wages) is evidence of a person's being able to work, and therefore not sufficiently disabled for SSDI benefits. This level of earnings is also considered evidence that a person already receiving SSDI no longer has a work-limiting disability. In order not to discourage reentry into the workforce by younger disabled persons, the SSDI program allows a period of earnings and continued Medicare coverage.

Disability benefits are based on average indexed monthly earnings (AIME), which are equal to total indexed covered earnings averaged over the number of years between 1956 or age twenty-five (whichever is later) and the year prior to the disablement. Average indexed monthly earnings are converted to a primary benefit amount using the same formula used for calculating the primary benefit amount for retired workers. There are several important distinctions between disabled-worker and retired-worker status. First, in calculating benefits, the earnings averaging period ends at the date of disablement, and thus can be of different length for persons of the same age. For retired workers, that period remains the same for individuals in the same birth cohort, regardless of date of retirement. Second, disabled-worker benefits are payable to individuals below age sixty-two, the minimum age of eligibility for retired-worker benefits. Third, individuals receiving disability benefits before age sixty-five are not assessed an early retirement penalty. Thus, a person applying for SSDI between ages sixty-two and sixty-four will not have his or her benefits lowered by the actuarial reduction that would be imposed for receipt of retired-worker benefits. Fourth, SSDI brings eligibility for Medicare at an age younger than sixty-five, the age at which retired-worker beneficiaries become eligible for Medicare.

Thus a worker who ceased paid work (voluntarily or involuntarily) at age fifty-five and applied for Social Security retirement benefits at age sixty-two would have an AIME calculated over a period that included seven years of zero earnings (between ages fifty-five and sixty-two) and a benefit that was reduced by 20 percent for early receipt. If the same worker were able to qualify for disability at age fifty-five, the averaging period would be reduced by those seven years, and no actuarial reduction would be imposed. Thus, older workers able to meet the Social Security disability criteria—which are somewhat relaxed at ages above fifty (Ycas)—may assess early SSDI application to be a better option than (1) later application for SSDI benefits or (2) delaying receipt until becoming eligible for retired-worker benefits.

Additional benefits are payable to the spouse, children, and survivors of disabled workers under eligibility rules identical to those for spouses, children, and survivors of retired workers. Benefits are payable to a spouse who is sixty-two or older (or at any age if he or she is caring for a child who is under age sixteen, or is disabled), although the spouse may receive only the higher benefit for which she or he is eligible from Social Security. Survivor benefits are payable at age sixty, although if the survivor is disabled, they may be received as early as age fifty. However, the disability must have started before the worker's death or within seven years after the death.

Employer-provided disability benefits

These programs can be divided into those which address short-term disability and long-term disability. Short-term disability coverage is most often paid sick leave. Although sick leave is a benefit widely offered by U.S. employers, duration of benefits is limited to the accumulated sick days. Some firms offer sickness and accident insurance, typically with a service requirement for eligibility.

Long-term disability coverage may be provided through separate disability policies or by provisions in an employer-sponsored pension plan. The Employee Benefit Research Institute (www.ebri.org) estimates that about one-third of U.S. workers are covered by long-term disability policies other than Social Security. This percentage has actually declined, as has the percentage of persons who are covered by pension plans that offer a disability benefit.

While these accounts are not necessarily linked to employment, early withdrawals without income tax penalty from Individual Retirement Accounts and 401(k) and 403(b) accounts are allowed when due to disability.

Health care cost coverage

Disability presents an additional disadvantage for security in retirement in that it is likely to be associated with extraordinary (compared to nondisabled individuals of the same age) medical care expenses and to require costly physical care that a nondisabled retiree does not face. If these additional expenses were incurred during working years but were not covered by health insurance, the individual's ability to save for retirement would have been further limited. When other family members provide unpaid services, these added responsibilities may reduce the care-taker's market earnings, and consequent savings that the disabled individual could share in retirement. Further, disabled workers not covered by employer-provided health insurance are forced into the individual insurance market, where coverage may be denied, premiums may be higher because of their greater health risks, or coverage may be limited by preexisting condition clauses.

Health insurance is important for the treatment and management of chronic conditions; its absence may contribute to the association between chronic conditions and economic status. SSDI beneficiaries are covered by Medicare following 24 consecutive months of benefit receipt. These individuals may purchase "Medigap" insurance, although out-of-pocket costs for these supplementary policies may limit purchase. Clearly, health insurance coverage is important to the treatment of chronic conditions, yet health insurance coverage is less likely among the disabled than among their healthy peers. Absence of coverage reduces the probability of effective treatment and management of work-limiting chronic conditions. Consider two of the most common chronic conditions among the elderly: arthritis, affecting almost half of all elderly people in the United States, and hearing loss, affecting 22 million people. Among persons between the ages of forty-five and sixty-four with arthritis, only 46 percent have private insurance, compared to 80 percent of those without arthritis. Hearing loss can be effectively treated with hearing aids, yet two out of three persons who are sixty-five or older and have hearing loss do not use hearing aids, in part a consequence of Medicare not covering hearing aids.

Karen Holden

See also Americans with Disabilities Act; Employment of Older Workers; Functional Ability; Job Performance; Retirement, Decision Making; Risk Management and Insurance; Social Security, History and Operations.

BIBLIOGRAPHY

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