Disability benefits for employees in private pension plans Although benefits vary, for many 20 year employees aged SS, a private pension and social security would replace about one-half of the worker's pre-disability earnings DONALD BELL AND WILLIAM WIATROWSKI Although private pension plans are thought of primarily surance benefits were typically available to employees as a source of cash income for the elderly, they typically under deferred disability retirement plans. (Long-term serve other functions as well . For example, they usually disability benefits were less common when immediate contain early retirement features and often provide pen- disability pensions were paid .) Such private benefits are sions to workers who lose their jobs because of disability . provided in addition to payments under the social secu- The high proportion of pension plans with disability rity system when a worker is incapacitated. retirement features is dramatized in data from the Bu- Under retirement plans providing immediate disabili- reau of Labor Statistics' annual survey of the incidence ty pensions, benefits were available to workers meeting and characteristics of employee benefit plans in medium plan definitions of disability ; commonly, service or age and large establishments .' Of the 1,002 private pension requirements, or both, were specified as well. Employees plans found in the 1980 survey, 86 percent had disabili- covered by deferred-benefit plans also had to reach the ty retirement features .2 This article analyzes the various stipulated early or normal retirement age to receive eligibility requirements for disability retirement and typ- benefits. ical benefit levels, as found in these plans. Illustrative benefit levels from all potential sources- Disabled workers may have other protection as well . disability retirement, long-term disability insurance, and They often are eligible for social security benefits and social security-were calculated as a percent of pre-re- also may be covered by private long-term disability in- tirement earnings for a hypothetical worker disabled at surance plans. This study includes retirement benefits age 55, with 20 years of service . Under these conditions, and related long-term disability and social security bene- combined private pension and social security benefits fits. However, excluded from the study are separate tended to replace about half of pre-disability earnings in long-term disability plans which would be the only instances when private pension plans provided immedi- source of private disability income, and general early re- ate retirement benefits . Replacement rates in many cases tirement provisions without specific disability features . were more liberal where retirement packages furnished Two-thirds of the 861 pension plans with disability deferred pensions integrated with long-term disability provisions offered immediate disability benefits . The re- benefits . As a rule, social security, rather than private maining third deferred benefits until the employee plans, was the larger income source for the disabled reached the early or normal retirement age stipulated by worker . the plan . However, immediate long-term disability in- Immediate and deferred benefits Sixty-eight percent of the 861 disability retirement Donald Bell and William Wiatrowski are economists in the Division of Occupational Pay and Employee Benefit Levels, Bureau of Labor plans examined offered immediate pensions. The balance Statistics . (32 percent) deferred benefit payments until the normal 36 retirement age or in some instances, at the employee's option, until the early retirement age . Table 1. Pension plans with immediate disability retirement provisions by type of benefit formula, A key element in any pension plan is the formula in- medium and large establishments, 1980 cluded for calculating benefits . (Common formulas in- Percent of., P lans with volve percentages of an employee's career or terminal immediate Plans with All Benefit formula disability immediate disability earnings and dollar amounts per year for which an indi- retirement disability retirement vidual is covered by the plan .' ) Most of the pension retirement plans plans studied used the same basic formula to calculate Total . 583 100 68 disability and normal retirement benefits . Unreduced normal benefits 418 72 49 Reduced normal benefits 85 15 10 Immediate disability retirement. Of the 583 plans with Actuarially reduced formulas . 39 7 5 immediate disability retirement provisions, nearly three- Same as early retirement . 29 5 3 fourths used an unreduced normal benefit formula for Percent per year reduction between retirement and specified age . 17 3 2 disabled workers. (See table 1 .) That is, beneficiaries re- Other than normal benefits 80 14 9 ceived pensions calculated as if disability occurred at Flat amount formulas . 19 3 2 the normal retirement age;4 no reduction in benefits was Dollars times years of service 24 4 3 made solely because of the early retirement age. Never- Percent of unreduced benefit minus social security 20 3 2 theless, these disability pensions tended to be lower Percent of earnings minus social security . 12 2 1 than those for normal retirement because benefits typi- Percent of earnings in highest of cally were based on shorter service. last years worked 5 1 1 An additional 15 percent of plans with immediate NOTE. Because of rounding, sums of individual items may not equal totals . disability benefits reduced pensions because of the rela- tively young age of those who retire on disability . Near- ly half of these plans provided for actuarial reductions; of the period between disability and the initiation of pensions for retirement at age 55 usually were about 61 pension payments. Thus, 77 percent of these plans percent below those for normal retirement at age 65 allowed service credit to accrue during all of the defer- with the same service. The remainder of these plans ral period, while 7 percent allowed partial credit, usual- provided for less than actuarial reductions, the average ly for 1 or 2 years. benefit for disability at age 55 being approximately 43 percent less than that for normal retirement at age 65 . Coordination of pensions and social security. Benefits The remaining 14 percent of the plans with immedi- under private pension plans may be coordinated with ate disability pensions based benefits on formulas those under the social security system . This occurs designed to temper reductions caused by shortness of through either offset or integration provisions in the pri- service or to yield higher returns than under the normal vate plans . Under the former approach, private benefits retirement formula. are reduced by all or part of the social security pay- Generally, plans do not provide for later modification ment. Integration provisions apply separate benefit for- of the benefits determined at the time of disability re- mulas to earnings above and below the social security tirement. However, 7 percent of the immediate disabili- taxable wage base; for example, 1 percent of earnings ty retirement plans specified a recalculation of benefits up to the social security tax base and 1 .5 percent of at age 65, mainly either to increase compensation for earnings above that tax base for each year of service. persons whose benefits were reduced because their dis- Thirty percent of all pension plan participants in the ability occurred before normal retirement age or to raise 1980 study were covered by offset provisions; 16 per- benefits for those with short service at the time of dis- cent were in plans with integrated formulas for normal ability retirement. Four percent recalculated benefits at retirement benefits .' Such coordination typically was ap- age 65 based on the normal retirement formula and ser- plicable to disability retirement, too. vice at the date of disability; 3 percent recalculated on the basis of credited service at the time of disability Long-term disability insurance plus the period of disability . A review of disability benefits must also consider long-term disability insurance, which often supplements Deferred disability retirement . In sharp contrast to the or serves as an alternative to disability pensions . Gener- typical practice under plans providing immediate bene- ally, these payments begin after sick leave and accident fits, only 16 percent of the deferred disability retirement and sickness insurance are exhausted and continue as plans based benefits solely on service at the time of dis- long as a disabled employee remains incapacitated, or ability . (See table 2.) Benefit calculations under most of until retirement age is reached . Forty percent of persons the deferred plans granted service credit for all or part covered by the Bureau's 1980 survey of employee bene- 37 MONTHLY LABOR REVIEW August 1982 e Disability Benefits fit plans participated in long-term disability plans. Spec- erally 50 to 60 percent of pre-retirement earnings. Offset ified benefits, including payments from social security provisions were in four-fifths of the long-term disability and other government programs such as workers' com- plans in establishments with either immediate or de- pensation, were usually a fixed percent of monthly earn- ferred disability retirement benefits. Substantially all of ings . Almost two-thirds of the participants were in the remainder specified an overall maximum benefit plans designed to provide 50 to 60 percent of pre-dis- from all sources, most often 70 or 75 percent