Social Security Privatization and SSDI

See this article from today's New York Times. A few excerpts:

If individual investment accounts become an integral part of Social Security, as President Bush is proposing, what will happen to workers who become disabled before they retire?

Will they be allowed to draw on the savings in their retirement accounts? Will their standard Social Security benefits be increased to make up for the fact that because they have worked fewer years, their personal accounts are likely to be smaller than those of retirees? If they do receive higher benefits, will they have to forfeit their investment savings?

These are among the dozens of questions posed in a report issued on Wednesday by the National Academy of Social Insurance, a private, nonpartisan organization of academics and government officials who specialize in issues like Social Security, Medicare and unemployment compensation.

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The issues involving disability are especially thorny.

Currently, 16 percent of those receiving monthly Social Security checks are people under retirement age who cannot work because they are disabled. They receive the same benefits, based on their earnings in their working years, that they would receive if they were retired. This is a central element in the safety net provided by Social Security.

Social Security provides more than half the total income for about half of these disabled people and more than 90 percent of the income for about one-fifth of them.

The premise behind almost all proposals to divert tax money into private accounts is that ordinary Social Security benefits would be reduced to save the government money, but theoretically retirees would be at least as well off because income from their private accounts would make up for the lower benefits.

But this would not work well for people who become disabled. Their accounts would not provide as much income as those of retirees, since they would have had fewer working years to put money into accounts.

The panel offered several options for dealing with the problem. One would be to give people access to their accounts when they become disabled. Another would be to give disabled workers higher Social Security benefits than retirees but require them to turn over their investment accounts to the government. Another would be to give them higher benefits when they become disabled and then lower the benefits and allow them to tap into their investment accounts when they reach retirement age.

Note that none of these options seems perfect. Giving me access to my private account when I become disabled means Social Security no longer serves an insurance function for me. The argument for private accounts is that over the long haul they'll get a better return than the current Social Security system for individual beneficiaries, but they're subject to much greater short-term fluctuations. It would really stink under this proposal to become disabled when the market is down. Letting me have disability insurance but only if I turn over my private account to the government means that it's not really my money any more. And I could really end up with the short end of the stick if I become disabled when the market's up -- I lose my whole investment (an investment I would have been able to keep had I made it to retirement) and exchange it for relatively modest insurance payments. And the third option, letting me get SSDI plus keep my private account, just drives up the cost of the privatization plan further.

The NASI report referenced in the Times article is discussed at this press release.