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Optimal Social Security with Imperfect Tagging

  • Oliver Denk

    (OECD - Economics Department and CEPII)

  • Jean-Baptiste Michau

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

Workers are exposed to the risk of permanent disability. We rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade-off between inducing the able to work and providing insurance against disability. After deriving the fi rst-order conditions to this problem, we calibrate the model to the U.S. economy and run a numerical simulation. The government should offer back-loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene ts. Also, the able who are (mistakenly) tagged as disabled should be encouraged to work until some early retirement age. This makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and, hence, improve insurance. Finally, we show how the first-best allocation of resources can asymptotically be implemented by making strategic use of the disability test.

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Paper provided by HAL in its series Working Papers with number hal-00796521.

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Date of creation: 04 Mar 2013
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Handle: RePEc:hal:wpaper:hal-00796521
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00796521
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  1. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," Levine's Working Paper Archive 391749000000000449, David K. Levine.
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  14. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
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  18. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
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