Occupations, retirement, and the value of disability insurance

Occupations vary greatly in physical intensity, and there are, correspondingly, many differences in later-life work disability risk, retirement patterns, and applications for Social Security Disability Insurance (SSDI)—a national program that insures shocks to work productivity due to disability, with about nine million current beneficiaries in the U.S. In light of its widespread coverage and large differences in utilization across occupations, this paper aims to measure the value of the SSDI program across a broad population and the extent to which it influences the major choice of occupation. Using data from the Health and Retirement Study and O*NET, I estimate a life-cycle equilibrium model of occupational choice, work, savings, and disability at older ages, and find that incorporating occupations and preference heterogeneity is an integral part of understanding work and SSDI application behavior. While SSDI coverage is nearly universal and the premiums from workers are uniform, estimates suggest that the value of the program varies greatly, from being worth 2.1 to 14.5 percent of earned income—depending on preferences and choice of occupation—though for all groups it is welfare improving. I also find that SSDI plays an important role in the choice of occupation for older workers, providing an insurance value that results in over ten percent more people choosing physically intense, blue-collar occupations at older ages. This overall effect, however, masks the underlying selection of less risk-averse individuals into blue-collar jobs, which, if not accounted for, would lead to overstating the effects of the SSDI program on behavior. A counterfactual experiment aimed at eliminating the distortion created by uniform SSDI tax rates shows that—even without any additional employer accommodation of disabled workers—occupation-specific tax rates lead to fewer aggregate work-disabled years.