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Disability Benefits as Social Insurance: Tradeoffs Between Screening Stringency and Benefit Generosity in Optimal Program Design

  • Timothy Waidman

    (Urban Institute)

  • John Bound

    (University of Michigan and NBER)

  • Austin Nichols

    (University of Michigan)

The Social Security Disability Insurance (SSDI) system is designed to provide income security to workers in the event that health problems prevent them from working. In order to qualify for benefits, applicants must pass a medical screening that is intended to verify that the individual is truly incapable of work. Past research has shown, however, that the screening procedures used do not function without error. If screening were error-free, it has can be demonstrated that it is socially optimal to distinguish the disabled non-worker from the non-disabled, providing benefits to the disabled. In this paper we first demonstrate that if the errors in the medical screening are too large, it will not be optimal to distinguish the disabled from the non-disabled. Then, we use data on the actual quality of screening to determine first, if segmenting the non-working population is desirable, and second whether the current SSDI system relies too heavily on screening than is justified. Our preliminary conclusion is that while screening is good enough to justify some distinction in benefits, it may not be good enough to justify the size of the benefit offered.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp042.pdf
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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp042.

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Length: 33 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:mrr:papers:wp042
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  1. Howard P. Marvel, 1982. "An Economic Analysis of the Operation of Social Security Disability Insurance," Journal of Human Resources, University of Wisconsin Press, vol. 17(3), pages 393-412.
  2. David T. Ellwood & Lawrence H. Summers, 1985. "Poverty in America: Is Welfare the Answer or the Problem?," NBER Working Papers 1711, National Bureau of Economic Research, Inc.
  3. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  4. Diamond, P. A. & Mirrlees, J. A., 1978. "A model of social insurance with variable retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 295-336, December.
  5. Diamond, Peter & Sheshinski, Eytan, 1995. "Economic aspects of optimal disability benefits," Journal of Public Economics, Elsevier, vol. 57(1), pages 1-23, May.
  6. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  7. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
  8. Haveman, Robert H. & Wolfe, Barbara L., 1984. "Disability transfers and early retirement: a casual relationship?," Journal of Public Economics, Elsevier, vol. 24(1), pages 47-66, June.
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