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Disability Testing and Retirement

  • Cremer, Helmuth
  • Lozachmeur, Jean-Marie
  • Pestieau, Pierre

This Paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labour force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labour and cannot be distinguished. They are not, however, counted in the same way in social welfare. Benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions that may be induced in the individuals’ retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants, nor to apply testing to all types of benefits. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4773.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4773
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  1. Robin Boadway & Maurice Marchand & Pierre Pestieau & María del Mar Racionero, 2002. "Optimal Redistribution with Heterogeneous Preferences for Leisure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 475-498, October.
  2. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2002. "Social Security, Retirement Age and Optimal Income Taxation," CESifo Working Paper Series 693, CESifo Group Munich.
  3. Raphael Desmet & Alain Jousten & Sergio Perelman & Pierre Pestieau, 2007. "Microsimulation of Social Security Reforms in Belgium," NBER Chapters, in: Social Security Programs and Retirement around the World: Fiscal Implications of Reform, pages 43-82 National Bureau of Economic Research, Inc.
  4. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, 07.
  5. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
  6. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  7. Jonathan Gruber, 1996. "Disability Insurance Benefits and Labor Supply," NBER Working Papers 5866, National Bureau of Economic Research, Inc.
  8. FLEURBAEY, Marc & MANIQUET, François, 1998. "Optimal income taxation: and ordinal approach," CORE Discussion Papers 1998065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Diamond, Peter A & Mirrlees, James A, 1986. " Payroll-Tax Financed Social Insurance with Variable Retirement," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 25-50.
  10. Parsons, Donald O, 1991. "The Health and Earnings of Rejected Disability Insurance Applicants: Comment," American Economic Review, American Economic Association, vol. 81(5), pages 1419-26, December.
  11. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  12. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-34, February.
  13. Maurice Marchand & Pierre Pestieau & María Racionero, 2003. "Optimal redistribution when different workers are indistinguishable," Canadian Journal of Economics, Canadian Economics Association, vol. 36(4), pages 911-922, November.
  14. 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.
  15. Jonathan Gruber & David A. Wise, 1999. "Introduction to "Social Security and Retirement around the World"," NBER Chapters, in: Social Security and Retirement around the World, pages 1-35 National Bureau of Economic Research, Inc.
  16. repec:cor:louvrp:-1701 is not listed on IDEAS
  17. Crawford, Vincent P & Lilien, David M, 1981. "Social Security and the Retirement Decision," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 505-29, August.
  18. Helmuth Cremer & Jean-Marie Lozachmeur & Pierre Pestieau, 2004. "Optimal Retirement and Disability Benefits with Audit," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 278-, September.
  19. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1, 07.
  20. Robin Boadway & Michael Keen, 1999. "Redistribution," Working Papers 983, Queen's University, Department of Economics.
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