Question: I am recovering from back surgery, and my doctor says I probably will never return to work. I understand that I may be able to retire on a disability pension that is paid partially by the company I work for and partially by disability payments from the state. These payments would bring me to one-half my salary until I reach the age of 65 (I am now 53). Two questions:
--If I retire on disability are these payments tax-free?
--When I reach the age of 65, am I penalized on my Social Security because I have been drawing disability for 12 years?--G.H.
Answer: Disability gets very, very complicated because you get all sorts of public and private insurers involved and overlapping each other. And also confusing the picture is the question of whether the disability is or is not work related . Reading between the lines, I see nothing to suggest that this is work related, however.
OK, now as to your statement that "these payments would bring me to one-half of my salary until I reach the age of 65." This is probably true . . . if you say so. I imagine this is information that you got from your employer and that it relates to private disability insurance that your company carries. This is fairly common and is normally wrapped around any benefits you may get from the state and/or Social Security.
State disability itself, according to Barry Elman, manager of the state disability office in Van Nuys, isn't pegged to any percentage of your salary but ranges from a minimum of $50 a week to a maximum of $224 a week, which is, indeed, based on your salary. It runs out, however, after 52 weeks, and if the disability is permanent, then Social Security enters the picture. But more on this anon.
And yes, this is tax-free (the state's portion, at least), because you've already paid for it through withholding--nine-tenths of 1% of your salary up to your first $21,900 of earnings.
If this disability of yours is work related, other rules apply, according to David Null, area supervisor for the information and assistance bureau of the state's division of industrial accidents. The same dollar minimum ($50) and maximum ($224) apply and, prior to 1979, there was a five-year maximum before going onto permanent disability. Now, however, there is no maximum time, although the benefits received are still regarded as "temporary disability."
Currently, the temporary disability payments continue until you either return to work, Null adds, or until you reach what is called either your "maximum point of improvement" or "permanent stationary" status--at which point you go on truly permanent disability.
The subtle difference here is that, under the old system, you might have a back injury taking you out of the work force for more than five years (at which time you went on permanent disability). Let's say at that point your doctor decides that another operation was called for. You would still remain on permanent disability.
Under the new system, however, the second operation would restart the procedure, and your recovery from that operation would put you back on the higher "temporary disability" benefits.
But enough of this. We aren't talking about a work-related disability anyway.
Let's take a look at how Social Security figures into all this, which, rightly, at the age of 53, concerns you most and is reflected in your question, "When I reach the age of 65, am I penalized on my Social Security because I have been drawing disability for 12 years?"
The assumption here is that you plan to wait until age 65 before claiming your Social Security benefits instead of filing for Social Security disability benefits now. According to Dana Edwards of Social Security's department of external affairs, there is no financial advantage in your waiting--as a matter of fact, it would probably penalize you.
It works this way if you wait until age 65 to take your normal retirement benefits: At that time Uncle Sam would use your 35 years of highest earnings to compute your monthly retirement benefits. And guess what? You're right--those 12 years of being on state disability would add up to 12 big zeroes in this computation because neither disability nor pension income is reckoned as income--only earned income counts toward Social Security.
So, what happens if you apply for Social Security disability income right now? Well, your benefits will be computed now on the basis of your 26 years of highest earnings (with no zero years). Although there is a mandatory five-month waiting period before you start receiving your Social Security disability checks, Edwards adds, you should apply immediately to start the clock ticking.