Skip to main content
Home Working together to build your tomorrow

Forty-five years ago, I used to sell disability income insurance, and the sales pitch at the time was that you received benefits from the insurance company if it was determined that you could not perform "each and every duty of your regular occupation." In those days, we used to point out that Social Security, by comparison, also had a disability benefit available, but if you could perform "any occupation -- like selling pencils on the sidewalk" you wouldn't receive a dime from the Social Security Administration.

In 1984, Congress relaxed that harsh definition to include musculoskeletal problems such as back pain along with a variety of mental illnesses. While I sympathize with anyone who is truly disabled, those gaming the system on several different levels are costing the country a lot of money.

Compared to earlier standards, the SSA claims window has opened wide for those who have any number of real or perceived disabilities. Not surprisingly, the recession has driven many to capitalize on that opportunity. The April 8 Wall Street Journal cites the number of people receiving disability benefits to be about 9 million, of which 2.5 million are relatively young -- under age 50.

The number of people no longer looking for work becomes a factor in the unemployment figures. If we include the people who have given up, then the true unemployment figure is said to be double the current 7 percent. But the 9 million people who fall into the "given up" category thanks to their disability claims are hardly that motivated to get back on the job hunting horse. They also now qualify for Medicare, so they have health insurance for a change. The average annual income benefit is about $2,000 a year less than what could be earned full-time working at minimum wage.

At least the SSA checks back with people from time to time to make sure they are still disabled. By contrast, employees retiring as public servants from a government job at any level find it relatively easy to arrange to be categorized as disabled -- for the rest of their lives.

One might ask, "So what? -- isn't the monthly payment costing local governments the same dollar amount regardless?" True, but the difference, unfortunately, for the rest of us taxpayers is that what would have been a retirement benefit taxed as ordinary income becomes a tax-free disability benefit. And no future check is ever done to see if the retiree, perhaps cured of their disability, still qualifies for tax-free income treatment. A typical disability case brought to my attention involved a retiree with a chronic back problem. A few years into retirement, he was winning water ski tournaments.

How this can happen is thanks to the following perverted system: A retirement board of trustees, usually consisting largely of government workers themselves, reviews individual applications supporting the payment of retirement benefits. Almost universally, they are approved.

This happens for many reasons, among them the thought that board members see themselves as being in the same situation someday.

Next, the amount of money paid out costs the retirement plan the same regardless of its tax treatment. There's no financial incentive to be a tax enforcer for the federal and state governments.

Finally, turning down a claim of disability will probably invite a lawsuit and trigger a cost of legal fees to the retirement plan itself when they had nothing to gain financially by being tough. In short, a board has everything to lose and nothing whatsoever to gain by turning down a disability claim.

Toward the end of the Vietnam War, I was an officer in the Army Medical Services Corp and I saw the machinations on the part of people in that system who all had the inside track on how to turn their military retirement into a tax-free disability benefit. Given that this practice is occurring at all levels of government, it's safe to declare it an epidemic of tax avoidance.

As loopholes go, however, it's reassuring to note that this is the "loophole for the little guy" as opposed to those reserved for "the One Percent."