A private alternative to social security disability

Under the current US Social Security system, those who exit the workforce with the intention of re-entering it after some time risk losing their disability benefits. Private accounts for disability benefits would allow workers to provide their own benefits. This would also ensure that workers do not contribute to a system that may not support them if they become disabled suggested Pamela Villarreal, a policy analyst and Alan Lin, an intern with the National Center for Policy Analysis.

What would happen to a 42-year-old American worker if both the employer and employee disability taxes were instead deposited into an individual disability account?

Assuming the woman began working full time at age 21, in 1985, with a salary of $30,000, and received a 3 per cent annual increase in nominal pay, by 1995 she was earning $40,317. During that period, the combined employer-employee Social Security payroll (FICA) tax for disability increased from 1 per cent to 1.88 per cent, and her disability coverage cost a total of $4,872. If these funds had been put in a disability account:

  • In 1985, the $300 paid into the disability system would go to a private account at a contribution rate of $25 a month.

  • Assuming the money earned an average annual rate of return of 10.87 per cent (the actual return of the S&P 500 stock index from 1985 to 2006), the worker would have about $26,000 by the time she returned to the workforce.

  • With the accrued amount in her private account, she would have enough to purchase a long-term disability insurance policy through her employer, if one were offered, or in the private market.

    These figures assume the private account continued to accumulate interest during the years she made no contribution, from 1996 to 2005.

    Source: Pam Villarreal and Alan Lin, Giving Credit Where it is Due Social Security Disability, National Center for Policy Analysis, Brief Analysis No. 612, March 17, 2008.

    For text: http://www.ncpa.org/pub/ba/ba612/

    For more on Social Security Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=39

    FMF Policy Bulletin/ 25 March 2008

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