How are disability benefits calculated?

If you’re living with a disability or caring for a disabled loved one, you’re not alone. Around a quarter of today’s 20-year-olds will become disabled by the time they reach retirement age. And yet, only 35% of workers have long-term disability insurance, which means many will rely on disability benefits from the federal government in the event that they are disabled.

Learning how these benefits work is crucial so you can understand how to get the financial assistance you need to help make ends meet, in the event that something happens to you or a loved one.

Let’s take a look at some of the different benefit options provided by the Social Security Administration (SSA), including how to qualify.

What is Social Security Disability Insurance (SSDI)?

Social Security Disability Insurance (SSDI) is a federal insurance program that provides financial assistance to individuals with a long-term disability who are unable to work due to their medical conditions.

If you meet the requirements, the program issues monthly payments to you or certain family members. The size of your social security disability benefits is based on your lifetime earnings and is calculated using a formula that includes your average indexed monthly earnings and primary insurance amount. More on what that all means below.

Disability claim process

The first step in the disability claim process is to file an application with the SSA. You can submit an application online, by phone, or by visiting your local Social Security office.

The SSA will review your application to determine whether you meet the basic eligibility requirements, including having a severe medical condition that prevents you from working.

If your application is approved, your claim will move to the next stage, which involves a medical review to determine the severity of your condition. To do this, the SSA will consider your medical records, doctor’s opinions, and any other relevant evidence.

If your condition is severe enough to meet the SSA’s definition of disability, your claim will be approved, and you will begin receiving benefits. Depending on the case and disability onset date, you may also be eligible for retroactive payments.

Work credits and qualification

Does your disability qualify? That depends. For one thing, they only pay benefits for total disability. If you have a partial disability or short-term disability, you would not be eligible for SSDI benefits.

The Social Security Administration uses five questions  to determine if your case meets its criteria.

1. Are you working? In 2023, you can’t earn more than $1,470 a month and qualify for the program.
2. Do you have a “severe” condition? It must prevent you from doing basic activities like standing, walking, sitting, lifting, or remembering.
3. Is your condition on their list? The SSA maintains a list of qualifying conditions that can be found here. If it is not on the list, they will evaluate it on a case-by-case basis.
4. Can you do the work you could do before? Your disability must prevent you from performing your particular line of work.
5. Can you do another job? Your condition and skills will be evaluated to see if you can perform another type of work.

In addition to these conditions, a work credit system determines your qualification for benefits. You earn a credit for every $1,640 of income and can only earn up to four credits per year. So, if you have earned $6,560 in a year, this fills your quota for the year.

In most cases, you need 40 credits to qualify for benefits, which is equivalent to working for at least ten years. However, younger workers who become disabled individuals before reaching this point may qualify with fewer credits .

Average indexed monthly earnings (AIME)

Your disability benefits are determined by something called average indexed monthly earnings, or AIME, which is calculated using your earnings history. The higher your AIME, the higher your SSDI will be. Here’s how it works.

First, the SSA adjusts or “indexes” your earnings to match the changes in general wage levels that took place during your years of employment. They use up to 35 years of income to compute this index.

Then, they take the years with the highest indexed earnings and divide the total amount by the number of months in those years. This gives you the AIME.

Learn more about how AIME is calculated here.

Primary insurance amount (PIA)

If you’re thinking “Great, more acronyms!,” we hear you. Basically, now that the SSA has computed your AIME, it will use that to determine your PIA. And that, in turn, will determine your SSDI.

Confused? Don’t be. Basically, once the Social Security Administration understands your earnings history, it can use that figure to determine what Social Security benefits you would have received at a typical retirement age. This is based on three simple calculations.

Here’s how it works  in 2023:

1. Take 90% of the first $1,115 of your AIME
2. Take 32% of the next $6,721 of your AIME
3. Take 15% of your AIME over $6,721
4. Add up these numbers
5. That’s your PIA

(FYI: The dollar amounts in these calculations are referred to as “bend points,”  and are updated each year based on cost-of-living adjustments.)

SSI benefit calculation

There’s one other form of federally provided disability benefit: If you have limited income and are 65 or older, blind, or disabled, Supplemental Security Income (SSI) provides financial assistance based on your individual needs. Unlike SSDI, SSI eligibility isn’t based on your work history or the amount of Social Security taxes you’ve paid.

Even if you are eligible for SSI, your monthly benefits might be reduced after subtracting your countable monthly income. The exact amount of your payments will depend on your living situation, such as whether you live alone, with a spouse, or in a group home.

Some states supplement the federal SSI payment  with their own state-funded programs, which can increase your overall benefit amount.

Are you covered?

Due to the urgency of financial assistance in the case of sudden disability or the strict requirements to be considered eligible, some people opt to purchase private disability insurance. Typically, it is easier to qualify for and pays out sooner than Social Security.

Some private employers provide disability insurance. But as with life insurance, sometimes it makes sense to secure your own disability insurance. If that might be of interest, start by getting a free quote online for Haven Disability.