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Option Value and Dynamic Programming Model Estimates of Social Security Disability Insurance Application Timing

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Author Info

  • Burkhauser, Richard V.

    ()
    (Cornell University)

  • Butler, J. S.

    ()
    (University of Kentucky)

  • Gumus, Gulcin

    ()
    (Florida Atlantic University)

Abstract

This paper develops dynamic structural models - an option value model and a dynamic programming model - of the Social Security Disability Insurance (SSDI) application timing decision. We estimate the time to application from the point at which a health condition first begins to affect the kind or amount of work that a currently employed person can do. We use Health and Retirement Study (HRS) and restricted access Social Security earnings data for estimation. Based on tests of both in-sample and out-of-sample predictive accuracy, our option value model performs better than both our dynamic programming model and our reduced form hazard model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 941.

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Length: 53 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:iza:izadps:dp941

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Related research

Keywords: option value; Health and Retirement Survey; Social Security Disability Insurance; dynamic programming;

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References

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  1. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1992. "Three Models of Retirement: Computational Complexity Versus Predictive Validity," NBER Working Papers 3558, National Bureau of Economic Research, Inc.
  2. 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.
  3. Bound, John & Waidmann, Timothy, 1992. "Disability Transfers, Self-Reported Health, and the Labor Force Attachment of Older Men: Evidence from the Historical Record," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1393-419, November.
  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  5. Kreider, Brent, 1998. "Workers' Applications to Social Insurance Programs When Earnings and Eligibility Are Uncertain," Journal of Labor Economics, University of Chicago Press, vol. 16(4), pages 848-77, October.
  6. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1996. "Retirement Incentives: The Interaction between Employer-Provided Pensions, Social Security, and Retiree Health Benefits," NBER Chapters, in: The Economic Effects of Aging in the United States and Japan, pages 261-293 National Bureau of Economic Research, Inc.
  7. James H. Stock & David A. Wise, 1990. "The Pension Inducement to Retire: An Option Value Analysis," NBER Working Papers 2660, National Bureau of Economic Research, Inc.
  8. Gruber, Jonathan & Kubik, Jeffrey D., 1997. "Disability insurance rejection rates and the labor supply of older workers," Journal of Public Economics, Elsevier, vol. 64(1), pages 1-23, April.
  9. John P. Rust, 1989. "A Dynamic Programming Model of Retirement Behavior," NBER Chapters, in: The Economics of Aging, pages 359-404 National Bureau of Economic Research, Inc.
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  11. Janice Halpern & Jerry A. Hausman, 1985. "Choice Under Uncertainty: A Model of Applications for the Social Security Disability Insurance Program," NBER Working Papers 1690, National Bureau of Economic Research, Inc.
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  13. Richard V. Burkhauser & J. S. Butler & Yang-Woo Kim & Robert R. Weathers II, 1999. "The Importance of Accommodation on the Timing of Disability Insurance Applications: Results from the Survey of Disability and Work and the Health and Retirement Study," Journal of Human Resources, University of Wisconsin Press, vol. 34(3), pages 589-611.
  14. Hugo Benitez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2000. "How Large is the Bias in Self-Reported Disability?," Working Papers 2000-01, Brown University, Department of Economics.
  15. Haveman, Robert H. & Wolfe, Barbara L., 1984. "Disability transfers and early retirement: a casual relationship?," Journal of Public Economics, Elsevier, vol. 24(1), pages 47-66, June.
  16. Jonathan Gruber & Jeffrey D. Kubik, 1994. "Disability Insurance Rejection Rates and the Labor Supply of Older Workers," NBER Working Papers 4941, National Bureau of Economic Research, Inc.
  17. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
  18. Berkovec, James & Stern, Steven, 1991. "Job Exit Behavior of Older Men," Econometrica, Econometric Society, vol. 59(1), pages 189-210, January.
  19. John Bound & Richard Burkhauser & Austin Nichols, 2001. "Tracking the Household Income of SSDI and SSI Applicants," Working Papers wp009, University of Michigan, Michigan Retirement Research Center.
  20. Richard V. Burkhauser & Mary C. Daly & Andrew J. Houtenville & Nigar Nargis, 2002. "Self-reported work limitation data: what they can and cannot tell us," Working Paper Series 2002-22, Federal Reserve Bank of San Francisco.
  21. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
  22. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
  23. Kreider, Brent, 1999. "Social Security Disability Insurance: Applications, Awards, and Lifetime Income Flows," Staff General Research Papers 5188, Iowa State University, Department of Economics.
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  26. Daula, Thomas & Moffitt, Robert, 1995. "Estimating Dynamic Models of Quit Behavior: The Case of Military Reenlistment," Journal of Labor Economics, University of Chicago Press, vol. 13(3), pages 499-523, July.
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Citations

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Cited by:
  1. MacDonald, Bonnie-Jeanne & Cairns, Andrew J.G., 2011. "Three retirement decision models for defined contribution pension plan members: A simulation study," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 1-18, January.
  2. Rob Euwals & Daniel Vuuren & Ronald Wolthoff, 2010. "Early Retirement Behaviour in the Netherlands: Evidence From a Policy Reform," De Economist, Springer, vol. 158(3), pages 209-236, September.
  3. Michele Belloni & Rob Alessie, 2010. "Retirement Choices in Italy: What an Option Value Model tells us," Tinbergen Institute Discussion Papers 10-102/3, Tinbergen Institute.
  4. Burkhauser, Richard V. & Butler, J. S. & Gumus, Gulcin, 2003. "Dynamic Modeling of the SSDI Application Timing Decision: The Importance of Policy Variables," IZA Discussion Papers 942, Institute for the Study of Labor (IZA).
  5. Hakola, Tuulia, 2002. "Alternative Approaches to Model Withdrawals from the Labour Market – A Literature Review," Working Paper Series 2003:4, Uppsala University, Department of Economics.

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