What Would Happen to Disability Benefits if Social Security was Privatized?

The Social Security Administration, a part of the federal government, not only oversees and administers retirement benefits to workers ready to kick back and enjoy their golden years, but it is also responsible for administering Social Security disability insurance (“SSDI”) and Supplemental Security Income (“SSI”) benefits to disabled people.

At various points in history, citizens have questioned whether their Social Security retirement benefits will be there for them when they are finally old enough to retire. Small, periodic adjustments in the FICA tax rates and gradual pushing back of the minimum retirement age have previously been effective in thwarting threats to the solvency of the trust fund from which Social Security retirement benefits is paid.

In today’s current climate, many American workers are skeptical about the Social Security system’s “long-term financial stability”, with only 37% reporting being “somewhat or very confident” that the system will continue to provide retirement benefits  “of at least equal value” to those received by current retirees. This sentiment has led to a renewal of the debate on whether Social Security should be privatized or whether other changes, like the historic go-to Band-Aid® of increasing the FICA tax rate and minimum retirement age should be employed to “save” the current system.

Social Security is funded through a FICA payroll tax on wages paid by workers and their employers. Part of that tax goes to the trust fund from which Social Security retirement benefits are paid, and another part goes to the trust fund from which Social Security Disability insurance benefits are paid. It should be noted that unlike SSDI work-based federal disability benefits, SSI– a means-based federal disability benefits program–is not funded through a payroll tax, but rather a general revenue tax.

Privatizing Social Security and would mean that workers would “make contributions to their own privately managed retirement-savings accounts,” instead of paying the Social Security payroll taxes as they do now.

Proponents for privatizing Social Security retirement benefits argue that the current system will not be able to stay afloat long-term because of a “virtual explosion” in the number of retirees which has begun and will continue with the baby boomer generation hitting retirement age. With insufficient numbers of current and foreseeable future workers paying into the system through payroll taxes to support the demand of the baby boomer’s retirement benefits, the system cannot continue on its present course and “will be unable to fully pay scheduled benefits by 2034 unless dramatic changes are made”.

Privatization proponents support in a “compulsory system of private retirement savings accounts for individuals” such as mandatory 401K plans which, assuming a good annual return, would leave retirees able to have “a reasonable retirement”. Privatization would give retirees the option to buy an annuity, dry down the account as needed, and leave the balance upon death to loved ones.

On the flip side, opponents of privatization say the current Social Security system is insurance that protects all workers and insured against lost earnings due to “old-age, disability, or death”. They argue a savings plan can’t protect against such unpredictable risks as “living to age 110, becoming disabled or dying prematurely, leaving dependent children” – – all risks which Social Security does protect.  

Critics of privatization point out investment risks of private savings plans, possibility of outliving those savings, high administrative costs of savings plans, high cost of private disability, life, and annuity policies and the risks of insurance companies going out of business as some reasons why privatization isn’t the answer. Social Security also pays benefits to spouses, divorced spouses, and dependent children “not only at retirement but also in the event of disability or death.” What would even a highly paid worker who becomes disabled unexpectedly at a young age survive on without the guaranteed benefits of Social Security – – a private savings plan that hasn’t had time to grow? Those wishing to save the current Social Security system argue that it could be done by requiring the wealthiest citizens to pay the same 6.2% contribution rate as minimum-wage workers rather than the 8/10 of 1% rate that those who earn $1 million or more contribute.

It remains to be seen whether Social Security will be “saved” or scrapped and what impact that will have on the disabled who rely on Social Security. At a minimum, it seems that workers would need to purchase expensive private disability insurance policies in addition to those mandated retirement account contributions. But what if those insurance companies go under?

If you are considering applying for SSDI benefits or SSI benefits, the Arizona disability attorneys at Roeschke Law LLC can help you at any step of the process, whether with the initial application or on appeal. Call us at 800-975-1866 to schedule a free consultation. Let us help you get the disability benefits you’re entitled to without delay. From our offices in Phoenix, Tucson, and Tempe, we represent clients throughout the state of Arizona.