Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms

The Social Security Disability Insurance (SSDI) Program has long been criticized by economists for its apparent work disincentives stemming from the imposition of 100-percent tax rates on earnings. However, the program has been modified in recent years to allow recipients to keep some of their earnings for fixed periods of time. Moreover, additional proposals have been made for lowering the tax rate further and for providing various additional financial work incentives. We use the basic labor supply model to show the expected effect of these reforms on work effort. In addition, we provide a numerical simulation that shows the magnitude of the monetary incentives provided by the reforms for different categories of individuals. We find that the proposed reforms have ambiguous effects on work effort and could, contrary to perceived wisdom, possibly reduce work effort and increase the number of SSDI recipients. However, the simulations show that reforms based on earnings subsidies for private employers are more likely to increase work effort and to lower the caseload.