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The Labor Supply Effects of Disability Insurance Work Disincentives: Evidence from the Automatic Conversion to Retirement Benefits at Full Retirement Age

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  • Nicole Maestas

    (RAND)

  • Na Yin

    (Baruch College-CUNY)

Abstract

The Social Security Disability Insurance (DI) program imposes strong work restrictions on beneficiaries; however, the causal effect of the work disincentives on labor supply has been difficult to estimate. We take a new look at this question by exploiting the fact that DI benefits are payable only until full retirement age (FRA), at which point they are converted to retired worker benefits, and the program’s implicit high marginal tax rate on earnings is abruptly relaxed. Using a quasiexperimental research design, we examine whether the DI work disincentives are binding by comparing changes in labor force participation rates before and after the FRA for DI beneficiaries and non-beneficiaries. We find a relative increase in labor force participation at FRA for DI beneficiaries of 10.4 percentage points, and argue that this is likely a lower bound estimate on the labor supply disincentive effects of the DI program.

Suggested Citation

  • Nicole Maestas & Na Yin, 2008. "The Labor Supply Effects of Disability Insurance Work Disincentives: Evidence from the Automatic Conversion to Retirement Benefits at Full Retirement Age," Working Papers wp194, University of Michigan, Michigan Retirement Research Center.
    • Handle: RePEc:mrr:papers:wp194
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    References listed on IDEAS

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    1. Chen, Susan & van der Klaauw, Wilbert, 2008. "The work disincentive effects of the disability insurance program in the 1990s," Journal of Econometrics, Elsevier, vol. 142(2), pages 757-784, February.
    2. Song, Jae G. & Manchester, Joyce, 2007. "New evidence on earnings and benefit claims following changes in the retirement earnings test in 2000," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 669-700, April.
    3. Gruber, Jonathan & Kubik, Jeffrey D., 1997. "Disability insurance rejection rates and the labor supply of older workers," Journal of Public Economics, Elsevier, vol. 64(1), pages 1-23, April.
    4. Jonathan Gruber, 2000. "Disability Insurance Benefits and Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1162-1183, December.
    5. 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.
    6. John Bound & Timothy Waidmann, 1992. "Disability Transfers, Self-Reported Health, and the Labor Force Attachment of Older Men: Evidence from the Historical Record," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(4), pages 1393-1419.
    7. David H. Autor & Mark G. Duggan, 2003. "The Rise in the Disability Rolls and the Decline in Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 157-206.
    8. 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.
    9. Meyer, Bruce D, 1995. "Natural and Quasi-experiments in Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(2), pages 151-161, April.
    10. Nicole Maestas & Xiaoyan Li, 2006. "Discouraged Workers? Job Search Outcomes of Older Workers," Working Papers wp133, University of Michigan, Michigan Retirement Research Center.
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    Cited by:

    1. Silva, José I. & Vall-Castello, Judit, 2012. "Why Are So Many Disabled Individuals Not Working in Spain? A Job Search Approach," IZA Discussion Papers 6317, Institute of Labor Economics (IZA).
    2. Krekó, Judit & Prinz, Daniel & Weber, Andrea, 2022. "Take-up and Labor Supply Responses to Disability Insurance Earnings Limits," IZA Discussion Papers 15377, Institute of Labor Economics (IZA).
    3. Jeffrey Hemmeter & Michelle Stegman Bailey, 2016. "Earnings after DI: evidence from full medical continuing disability reviews," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-22, December.

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