Why is Disability Insurance (DI) Important?
In many cases, DI benefits are a lifeline for injured workers and their dependents. Today we will examine the DI program a little closer.
DI benefits are calculated using a dynamic formula based on something called the “replacement rate,” which is a fraction that describes the percentage of a worker’s pre-injury earnings that gets replaced by DI benefits. Workers who earned higher wages during their working years are awarded larger benefits (in dollar amounts) than lower earners, BUT those benefits ultimately constitute a lower overall percentage of their earnings.
To put the replacement rate in a more tangible context, let’s look at the numbers. According to an article by Social Security scholar L. Scott Muller, DI benefits replaced between 55-60% of a mid-level worker’s average lifelong earnings and between 50-55% of final pre-injury earnings.
DI benefits are available to qualified, injured workers regardless of their assets or non work-related income. However, studies suggest that for a great number of recipients, many of whom hover around the poverty line, DI benefits constitute between 75-90% of their monthly income.
Since the DI program’s inception in 1956, legislators, economists, and social scientists have wondered if it disincentivizes labor. Next time, we will explore the validity (or perhaps invalidity) of this concern.