The Welfare Implications of Increasing Disability Insurance Benefit Generosity
AbstractThe focus on efficiency costs in the empirical literature on Disability Insurance (DI) provides a misleading view of the adequacy of payment levels. In order to evaluate whether workers are over- or under-insured through the social insurance program, we develop a framework that allows us to simulate the benefits as well as the costs associated with marginal changes in payment generosity from a representative cross-sectional sample of the population. Under the assumption that individuals are reasonably risk averse, our simulations suggest the typical worker would value increased benefits somewhat above the average costs of providing them. However, we find that benefit increases tend to lower average utility when we average across all individuals in our sample, particularly at high levels of risk aversion. This counterintuitive finding arises because some lower income DI-insured workers face replacement rates that are near or above one. For such individuals, a benefit increase would represent transfers from an even lower income state of the world in which they are not on DI to one in which they are, a transfer that would not be beneficial even if there were no behavioral distortions associated with the provision of DI benefits.
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Bibliographic InfoPaper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2002-02.
Length: 73 pages
Date of creation: Sep 2002
Date of revision:
Publication status: published in Journal of Public Economics 88(12): 2487-2514.
Other versions of this item:
- Bound, John & Cullen, Julie Berry & Nichols, Austin & Schmidt, Lucie, 2004. "The welfare implications of increasing disability insurance benefit generosity," Journal of Public Economics, Elsevier, vol. 88(12), pages 2487-2514, December.
- 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.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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