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Disability risk, disability insurance and life cycle behavior

Author

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  • Hamish Low

    () (Institute for Fiscal Studies and Trinity College, Cambridge)

  • Luigi Pistaferri

    (Institute for Fiscal Studies and Stanford University)

Abstract

The Disability Insurance (DI) program in the US is a large social insurance program that offers income replacement benefits to people with work limiting disabilities. The proportion of DI claimants in the US is now almost 5% of the working-age population and the cost is three times that of unemployment insurance. The key questions in thinking about the size and growth of the DI program are whether program claimants are genuinely unable to work, and how valuable is the insurance provided. This paper has three aims: We provide a framework for weighing up the insurance value of disability benefi…ts against the incentive cost of inducing healthy individuals to stop work at different points of their life-cycle. We estimate the risks to health that may lead to work-limiting disabilities and the risk to wages that may lead to individuals choosing not to work. We also estimate the extent of false awards made through the DI program alongside the proportion of awards to those in genuine need. We use our model and estimates to characterize the economic effects of the disability insurance and to consider how policy reforms would affect behaviour and standard measures of household welfare. We differentiate disability status by its severity, and show that a severe disability shock leads to a decline in wages of 40%, as well as a substantial rise in the fixed cost of going to work. In terms of the effectiveness of the DI program, we estimate high levels of rejections of genuine applicants. In our counterfactual simulations, this means that household welfare increases as the program becomes less strict, despite the worsening incentives for false applications that this implies. On the other hand, incentives for false applications are reduced by reducing generosity and increasing reassessments, and these policies increase household welfare, despite the worse insurance implied.

Suggested Citation

  • Hamish Low & Luigi Pistaferri, 2010. "Disability risk, disability insurance and life cycle behavior," IFS Working Papers W10/11, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:10/11
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bruce Meyer & Wallace K. C. Mok, 2016. "Disability, Earnings, Income and Consumption," NBER Chapters,in: Social Insurance Programs (Trans-Atlantic Public Economic Seminar - TAPES) National Bureau of Economic Research, Inc.
    2. Kai Liu, 2010. "Wage Risk, On-the-job Search and Partial Insurance," 2010 Meeting Papers 1136, Society for Economic Dynamics.
    3. repec:asb:wpaper:201216 is not listed on IDEAS
    4. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-1467, September.
    5. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
    6. Liu, Kai, 2015. "Wage Risk and the Value of Job Mobility in Early Employment Careers," IZA Discussion Papers 9256, Institute for the Study of Labor (IZA).
    7. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, Elsevier.
    8. Monika Bütler & Eva Deuchert & Michael Lechner & Stefan Staubli & Petra Thiemann, 2015. "Financial work incentives for disability benefit recipients: lessons from a randomised field experiment," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-18, December.
    9. Eric French & Jae Song, 2012. "The effect of Disability Insurance receipt on labor supply: a dynamic analysis," Working Paper Series WP-2012-12, Federal Reserve Bank of Chicago.
    10. Felix Reichling & Kent Smetters, 2013. "Optimal Annuitization with Stochastic Mortality Probabilities," NBER Working Papers 19211, National Bureau of Economic Research, Inc.
    11. García-Gómez, Pilar, 2011. "Institutions, health shocks and labour market outcomes across Europe," Journal of Health Economics, Elsevier, vol. 30(1), pages 200-213, January.
    12. repec:eee:hapoch:v1_457 is not listed on IDEAS
    13. Haan, Peter & Prowse, Victoria, 2014. "Optimal Unemployment Insurance and Welfare Benefits in a Life-cycle model of Family Labor Supply and Savings," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100625, Verein für Socialpolitik / German Economic Association.
    14. Pilar García-Gómez & Hans-Martin Gaudecker & Maarten Lindeboom, 2011. "Health, disability and work: patterns for the working age population," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(2), pages 146-165, April.

    More about this item

    Keywords

    Disability; social security; savings behavior; wage risk;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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