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The welfare implications of increasing disability insurance benefit generosity

  • Bound, John
  • Cullen, Julie Berry
  • Nichols, Austin
  • Schmidt, Lucie

The 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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 88 (2004)
Issue (Month): 12 (December)
Pages: 2487-2514

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Handle: RePEc:eee:pubeco:v:88:y:2004:i:12:p:2487-2514
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Kreider, Brent, 1999. "Social Security Disability Insurance: Applications, Awards, and Lifetime Income Flows," Staff General Research Papers 5188, Iowa State University, Department of Economics.
  2. R. V. Burkhauser & R. H. Haveman & B. L. Wolfe, . "How people with disabilities fare when public policies change," Institute for Research on Poverty Discussion Papers 974-92, University of Wisconsin Institute for Research on Poverty.
  3. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  4. John Bound & Timothy Waidmann, 2000. "Accounting for Recent Declines in Employment Rates among the Working-Aged Disabled," NBER Working Papers 7975, National Bureau of Economic Research, Inc.
  5. Currie, Janet & Madrian, Brigitte C., 1999. "Health, health insurance and the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 50, pages 3309-3416 Elsevier.
  6. 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.
  7. David H. Autor & Mark G. Duggan, 2003. "The Rise In The Disability Rolls And The Decline In Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 157-205, February.
  8. Jonathan Gruber, 2000. "Disability Insurance Benefits and Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1162-1183, December.
  9. John Bound & Timothy Waidmann, 2002. "Accounting for Recent Declines in Employment Rates among Working-Aged Men and Women with Disabilities," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 231-250.
  10. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
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  12. Patricia M. Anderson & Bruce D. Meyer, 1995. "The Incidence of a Firm-Varying Payroll Tax: The Case of Unemployment Insurance," NBER Working Papers 5201, National Bureau of Economic Research, Inc.
  13. Timothy Waidmann & John Bound & Michael Schoenbaum, 1995. "The Illusion of Failure: Trends in the Self-Reported Health of the U.S. Elderly," NBER Working Papers 5017, National Bureau of Economic Research, Inc.
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  15. Edward J. Bird, 1996. "Repairing the safety net: Is the EITC the right patch?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 15(1), pages 1-31.
  16. Helen Levy, 2004. "Employer-Sponsored Disability Insurance: Where are the Gaps in Coverage?," NBER Working Papers 10382, National Bureau of Economic Research, Inc.
  17. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-72, July.
  18. Robert Haveman & Barbara Wolfe, 1990. "The Economic Well-Being of the Disabled: 1962-84," Journal of Human Resources, University of Wisconsin Press, vol. 25(1), pages 32-54.
  19. 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.
  20. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  21. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
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