Social Security Reform: The Importance of Disability Insurance and Annuities in Individual Accounts

July 2005, Vol. 26, No. 7
Paperback, 20 pp.
PDF, 1,274 kb
Employee Benefit Research Institute, 2005

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Executive Summary

• Disability vs. retirement benefits: An important component of Social Security is its provision of disability benefits—not just retirement benefits. However, almost all of the discussion to date of reforming Social Security has focused on retiree benefits. While reforms that include an individual account may do a better job of providing retiree benefits, individual accounts are not as well suited to provide a disability benefit, due to the lost years of compounding and contributions to an account because a disabled worker is unable to work until reaching retirement age. As a result, many account proponents say disability benefits should be protected from any benefit cuts.

• Protecting disability benefits means deeper cuts elsewhere: If disability benefits are to be preserved at current-law levels, retiree benefits could be faced with cuts of an additional 25 per-cent to 40 percent (or an equivalent increase in revenue) above what would be needed to close the funding gap in the program.

• Length of receiving benefits: For those who begin to take Social Security benefits, the overwhelming majority receive these benefits for a considerable time; in fact, 85 percent or more will receive them for 10 or more years. Questions have arisen in the individual account discussion about leaving funds to heirs due to an early death. The data show that far more retirees would need to be concerned with running out of funds than would be concerned with being able to leave a bequest.

• Annuities and the poverty level: By 2015, under Model 2 individual accounts, 60 percent of the individuals who would receive retiree benefits would need to annuitize some or all of their individual account to have a total benefit that exceeds the poverty level. But almost no private annuities currently available are indexed for inflation—as are current Social Security benefits. It is uncertain whether annuities from individual accounts would be available at all in the private market, whether they would be guaranteed, or how they would be priced.