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Disability Risk, Disability Insurance and Life Cycle Behavior

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  • Hamish Low
  • Luigi Pistaferri

Abstract

This paper provides a life-cycle framework for weighing up the insurance value of disability benefits against the incentive cost. Within this framework, we estimate the life-cycle risks that individuals face in the US, as well as the parameters governing the disability insurance program, using indirect inference and longitudinal data on consumption, disability status, disability insurance receipt, and wages. We use our estimates to characterize the economic effects of disability programs and to consider how policy reforms would affect behaviour and standard measures of household welfare. Because of high levels of false rejections associated with the screening problem, average household welfare increases as the program becomes less strict, despite the worsening incentives that this implies. Incentives for false applications are reduced by reducing generosity and increasing reassessments and these policies also increase average household welfare, despite the worse insurance implied.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15962.

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Date of creation: May 2010
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Handle: RePEc:nbr:nberwo:15962

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References

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  1. Bruce D. Meyer & Wallace K.C. Mok, 2013. "Disability, Earnings, Income and Consumption," NBER Working Papers 18869, National Bureau of Economic Research, Inc.
  2. Hugo Benitez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2000. "How Large is the Bias is Self-Reported Disability?," NBER Working Papers 7526, National Bureau of Economic Research, Inc.
  3. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series, Federal Reserve Bank of Chicago WP-09-02, Federal Reserve Bank of Chicago.
  4. Low, Hamish & Meghir, Costas & Pistaferri, Luigi, 2007. "Wage Risk and Employment Risk Over the Life Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6187, C.E.P.R. Discussion Papers.
  5. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  6. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 482-503, June.
  7. Steven Stern, 1989. "Measuring the Effect of Disability on Labor Force Participation," Journal of Human Resources, University of Wisconsin Press, vol. 24(3), pages 361-395.
  8. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 117-34, February.
  9. Giovanni Gallipoli & Laura Turner, 2009. "Household Responses to Individual Shocks: Disability and Labor Supply," Working Paper Series, The Rimini Centre for Economic Analysis 04_09, The Rimini Centre for Economic Analysis.
  10. Timothy Waidman & John Bound & Austin Nichols, 2003. "Disability Benefits as Social Insurance: Tradeoffs Between Screening Stringency and Benefit Generosity in Optimal Program Design," Working Papers, University of Michigan, Michigan Retirement Research Center wp042, University of Michigan, Michigan Retirement Research Center.
  11. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Kreider, Brent, 1999. "Latent Work Disability and Reporting Bias," Staff General Research Papers, Iowa State University, Department of Economics 5185, Iowa State University, Department of Economics.
  13. Amy Finkelstein & Erzo F.P. Luttmer & Matthew J. Notowidigdo, 2008. "What Good Is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption," NBER Working Papers 14089, National Bureau of Economic Research, Inc.
  14. Laura Turner & Giovanni Gallipoli, 2010. "Household Responses to Individual Shocks: Disability, Labour Supply," 2010 Meeting Papers, Society for Economic Dynamics 110, Society for Economic Dynamics.
  15. John Bound & Julie Berry Cullen & Austin Nichols & Lucie Schmidt, 2002. "The Welfare Implications of Increasing Disability Insurance Benefit Generosity," NBER Working Papers 9155, National Bureau of Economic Research, Inc.
  16. Oliver Denk & Jean-Baptiste Michau, 2013. "Optimal Social Security with Imperfect Tagging," Working Papers, HAL hal-00796521, HAL.
  17. David Autor & Mark Duggan, 2006. "The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding," NBER Working Papers 12436, National Bureau of Economic Research, Inc.
  18. Kreider, Brent & Pepper, John V., 2003. "Disability and Employment: Reevaluating the Evidence in Light of Reporting Errors," Staff General Research Papers, Iowa State University, Department of Economics 10229, Iowa State University, Department of Economics.
  19. John Bound, 1991. "Self-Reported Versus Objective Measures of Health in Retirement Models," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 106-138.
  20. Hugo Benitez-Silva & Moshe Buchinsky & John Rust, 2004. "How Large are the Classification Errors in the Social Security Disability Award Process?," NBER Working Papers 10219, National Bureau of Economic Research, Inc.
  21. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
  22. Dan Black & Kermit Daniel & Seth Sanders, 2002. "The Impact of Economic Conditions on Participation in Disability Programs: Evidence from the Coal Boom and Bust," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 27-50, March.
  23. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  24. Benitez-Silva, Hugo & Buchinsky, Moshe & Chan, Hiu Man & Rust, John & Sheidvasser, Sofia, 1999. "An empirical analysis of the social security disability application, appeal, and award process," Labour Economics, Elsevier, Elsevier, vol. 6(2), pages 147-178, June.
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Citations

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Cited by:
  1. Hamish Low & Costas Meghir & Luigi Pistaferri, 2008. "Wage risk and employment risk over the life cycle," IFS Working Papers, Institute for Fiscal Studies W08/06, Institute for Fiscal Studies.
  2. Bruce D. Meyer & Wallace K.C. Mok, 2013. "Disability, Earnings, Income and Consumption," NBER Working Papers 18869, National Bureau of Economic Research, Inc.
  3. Bick, Alexander & Choi, Sekyu, 2012. "Revisiting the Effect of Household Size on Consumption Over the Life-Cycle," MPRA Paper 41756, University Library of Munich, Germany.
  4. Pilar García-Gómez & Hans-Martin Gaudecker & Maarten Lindeboom, 2011. "Health, disability and work: patterns for the working age population," International Tax and Public Finance, Springer, Springer, vol. 18(2), pages 146-165, April.
  5. Buetler, Monika & Lechner, Michael & Thiemann, Petra & Deuchert, Eva & Staubli, Stefan, 2014. "Financial work incentives for disability benefit recipients: Lessons from a randomized field experiment," Economics Working Paper Series 1406, University of St. Gallen, School of Economics and Political Science.
  6. Elena Capatina, 2012. "Life Cycle Effects of Health Risk," Working Papers, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales 201216, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
  7. García-Gómez, Pilar, 2011. "Institutions, health shocks and labour market outcomes across Europe," Journal of Health Economics, Elsevier, Elsevier, vol. 30(1), pages 200-213, January.
  8. Eric French & Jae Song, 2012. "The effect of Disability Insurance receipt on labor supply: a dynamic analysis," Working Paper Series, Federal Reserve Bank of Chicago WP-2012-12, Federal Reserve Bank of Chicago.

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