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Disability Testing and Retirement

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  • Cremer, Helmuth
  • Lozachmeur, Jean-Marie
  • Pestieau, Pierre

Abstract

This paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labour force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labour and cannot be distinguished. However, they are not counted in the same way in social welfare. Benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions which may be induced in the individuals’ retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5546.

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Date of creation: Mar 2006
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Handle: RePEc:cpr:ceprdp:5546

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Keywords: disability; retirement; social security;

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References

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  1. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  2. Robin Boadway & Michael Keen, 1999. "Redistribution," Working Papers 983, Queen's University, Department of Economics.
  3. MARCHAND, Maurice & PESTIEAU, Pierre & RACIONERO, Maria, . "Optimal redistribution when different workers are indistinguishable," CORE Discussion Papers RP -1701, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Jonathan Gruber, 1996. "Disability Insurance Benefits and Labor Supply," NBER Working Papers 5866, National Bureau of Economic Research, Inc.
  5. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2004. "Optimal Retirement and Disability Benefits with Audit," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 278-, September.
  6. Raphael Desmet & Alain Jousten & Sergio Perelman & Pierre Pestieau, 2007. "Microsimulation of Social Security Reforms in Belgium," NBER Chapters, in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 43-82 National Bureau of Economic Research, Inc.
  7. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2004. "Social security, retirement age and optimal income taxation," Journal of Public Economics, Elsevier, vol. 88(11), pages 2259-2281, September.
  9. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, vol. 79(3), pages 482-503, June.
  10. FLEURBAEY, Marc & MANIQUET, François, 1998. "Optimal income taxation: and ordinal approach," CORE Discussion Papers 1998065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
  12. Crawford, Vincent P & Lilien, David M, 1981. "Social Security and the Retirement Decision," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 505-29, August.
  13. Diamond, Peter A & Mirrlees, James A, 1986. " Payroll-Tax Financed Social Insurance with Variable Retirement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 25-50.
  14. Jonathan Gruber & David A. Wise, 2002. "Social Security Programs and Retirement Around the World: Micro Estimation," NBER Working Papers 9407, National Bureau of Economic Research, Inc.
  15. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, vol. 81(5), pages 1419-26, December.
  16. repec:fth:louvco:9865 is not listed on IDEAS
  17. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  18. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-34, February.
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Citations

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Cited by:
  1. JACQUET, Laurence & VAN DE GAER, Dirk, . "A comparison of optimal tax policies when compensation or responsibility matter," CORE Discussion Papers RP -2421, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. CREMER, Helmuth & LOZACHMEUR, Jean-Marie & PESTIEAU, Pierre, 2006. "Social security and retirement decision: a positive and normative approach," CORE Discussion Papers 2006019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Laurence Jacquet, 2014. "Tagging and redistributive taxation with imperfect disability monitoring," Social Choice and Welfare, Springer, vol. 42(2), pages 403-435, February.
  4. PESTIEAU, Pierre & RACIONERO, Maria, . "Optimal redistribution with unobservable disability: welfarist versus non-welfarist social objectives," CORE Discussion Papers RP -2157, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Helmut CREMER & Jean-Marie LOZACHMEUR & Pierre PESTIEAU, 2006. "Retirement age and health expenditures," Annales d'Economie et de Statistique, ENSAE, issue 83-84, pages 167-186.
  6. Maria Racionero & Pierre Pestieau, 2012. "Harsh occupations, health status and social security," CEPR Discussion Papers 672, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  7. Laurence Jacquet, 2010. "Take it or Leave it: Take-up, Optimal Transfer Programs, and Monitoring," CESifo Working Paper Series 3018, CESifo Group Munich.
  8. Laurence Jacquet & Dirk Van de gaer, 2013. "Politiques fiscales optimales pour les bas revenus et principe de compensation," THEMA Working Papers 2013-04, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Laurence jacquet, 2013. "Tagging and Redistributive Taxation with Imperfect Disability Monitoring," THEMA Working Papers 2013-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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