The 529 ABLE plans in the U.S., launched a year ago, are useful for people with disabilities because they provide a tax-free way for themselves, their families or friends to save money for qualified expenses such as education or transportation. They also help protect people with disabilities from losing social security benefits when they cross income thresholds. However, policy makers need to redefine disability and revisit restrictions that existing laws place on people with disabilities from taking employment and becoming independent, experts from Wharton and the University of Texas said.
The 529 ABLE plan is “an important statement and a great opportunity for people with disabilities,” said Lex Frieden, professor of biomedical informatics and physical medicine and rehabilitation at the University of Texas. “Philosophically, the approach is at least equally as important as the potential impact.” Frieden also directs the Independent Living Research Utilization program at The Institute for Rehabilitation and Research at Memorial Hermann hospital in Houston, Texas. He is best known for his contributions to the Americans with Disabilities Act of 1990.
However, according to Wharton professor of business economics and public policy Kent Smetters, the ABLE plans have limited impact. For one, he noted that 15 states do not offer the plan. Also, they form a “small fraction” of the 529 education plans, which in turn are a tenth the size of 401(k) retirement savings plans, he said. Total savings under 401(k) plans were $4.49 trillion at the end of the third quarter of 2015, according to the Investment Company Institute of Washington, D.C.
Frieden and Smetters took stock of the ABLE program and identified aspects of disability programs that need remedial action on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
The ABLE Act, passed in December 2014, amends Section 529 of the Internal Revenue Service Code of 1986 to create tax-free savings accounts for individuals with disabilities. For many years, 529 plans have helped families save money for college education for their children. The new law allows people to select a plan sponsored by any state, and not just the one in which they live.
“Disability doesn’t necessarily need to mean that someone cannot work, doesn’t work and may not work.” –Lex Frieden
Also, anybody — such as a family member, friend or neighbor — could invest in the ABLE plans to benefit a person with disability. The tax benefits and income growth would accrue to that investor, who also has the option to change the beneficiary over time. Smetters noted that the $14,000 annual contribution limit is exactly equal to the threshold for tax exemption on gifts.
Smetters said the principal benefit of the ABLE plan is the federal tax break, since some states do not offer relief from state taxes. For example, Pennsylvania offers state tax relief for ABLE plan investors, while California does not, he explained. However, the value of that tax relief for many people will be quite small, he added.
Frieden pointed out that the ABLE program helps people with disabilities get around restrictions they face if they are also beneficiaries of social security benefits. Such people must report any income they receive in excess of $2,000 annually, which puts them at risk of becoming ineligible for both social security payments and health care benefits such as Medicaid.
“This has been a restriction and a disincentive that has prevented many people with disabilities from even trying to be productive and to be in the workforce,” said Frieden. The ABLE plan will help people with disabilities to put money aside — up to $14,000 a year — into savings, and that money will not be counted towards the $2,000 ceiling with the social security program, he explained.
Disability a ‘Murky Concept’
In order to be eligible for the plan, a person must have had the onset of a disability before the age of 26, and be able to prove that he or she has that disability. According to Frieden, of the 58 million Americans with disabilities, only an estimated 5.8 million people will qualify for the ABLE plans. He noted that the major proponents of the ABLE plan were advocates of people with mostly intellectual disabilities, otherwise termed as developmental disabilities.
“Many parents of children who were born with disabilities were concerned about being able to have a savings account for their children,” said Frieden. The threshold of 26 years of age “is correlated to some degree with the notion that people who are disabled at birth or acquired a disability when they were younger may have greater needs than those [who were] older,” he explained.
“The more we try to simplify [social security rules], the more people seem to be afraid that it is a ruse and they won’t take the risk to go to work.” –Lex Frieden
The threshold of 26 years is significant because “disability is a murky concept,” according to Smetters. “Disability rates increase dramatically once you hit older ages, [and] many disabilities are hard to verify,” he said.
The IRS has “fairly generous” rules governing proof of disability, noted Frieden. “This is one of the few such programs where a person doesn’t have to go through a long process and be examined by multiple physicians in order to prove their eligibility for the program,” he added.
Frieden called for a fresh definition for disability, explaining that its meaning has changed over the years. “People with disabilities should be able to be independent and productive,” he said. “Disability doesn’t necessarily need to mean that someone cannot work, doesn’t work and may not work. We have to change the definition there and modernize our approach to income support.” He added that people with disabilities “should be encouraged to continue working and be incentivized for living independently in the community.”
Frieden advocated “a comprehensive approach” from the Social Security Administration to rectify those disincentives. “The more we try to simplify it, the more people seem to be afraid that it is a ruse and they won’t take the risk to go to work,” he said. “As a result, a very low proportion of people who are eligible for social security disability payments ever return to work.” He noted that technology today offers many opportunities for people with disabilities to work and earn money, “but they don’t want to jeopardize those benefits.”
Smetters said there is good reason for the income and asset tests for these programs. “The evidence from other countries is that if you make eligibility too easy, such as in the Netherlands, lots of people are disabled,” he said. “So the idea was to deal with this moral hazard problem.” He added that experts at Wharton are studying the various disability programs and suggesting improvements.
“Everything we do about disability is completely off the mark.” –Kent Smetters
Gaps in Risk-pooling
According to Smetters, the bigger issue is that “these plans reflect a continued fragmentation of how we treat health care, because we are not doing it correctly.” He called for the entire approach to risk-pooling to be revisited. “Everything we do about disability is completely off the mark,” he said.
Smetters referred to the finding of the Centers for Diseases Control and Prevention that about 75% of all health care spending in the U.S. is for chronic metabolic diseases. He said that while those conditions are largely preventable through diet and exercise, health care in the U.S. is delivered mostly through group insurance plans or programs under the Affordable Care Act.
Smetters argued against risk-pooling for people with those chronic metabolic diseases. “What we should be pooling on are things that are beyond our control, [such as] genetic issues and disabilities,” he said. “We’re pooling exactly on the wrong things in society and then we try to make up with these different little programs [such as the ABLE program].”