Evaluating Recent Crackdowns on Disability Benefits: Effects on Income and Health Care Use in Australia

Many developed countries have enacted reforms to reduce enrollment in disability benefits (DI). We evaluate the effects of a DI crackdown in Australia on the most comprehensive set of outcomes available to date, including earnings, government benefits, family income, and health care utilization. Using a 2014 reform to Australia’s Disability Support Pension, we find that, on average, DI removal has a net zero effect on household income but leads to an increase in prescriptions for strong mental health drugs. However, average effects mask heterogeneity by family structure. For removed recipients living with family, family members increase their earnings by enough to offset the lost DI income, with minimal increase in mental health prescriptions. In contrast, removed recipients living alone do not increase their own earnings or have family support, but their use of strong mental health drugs increases dramatically. We develop a welfare analysis that considers multiple margins of behavioral adjustment. We find that behavioral adjustments offset more than half of the private welfare loss for recipients living with family but very little for those living alone. Government savings exceed household willingness to pay for DI for those living with family, but not for those living alone.