On the costs of disability insurance

The costs of social insurance come from two sources: first, the social insurance changes the behavior of individuals, and second, taxes that are levied to finance these programs create further losses. We extend the standard Ramsey model by a precautionary saving motive and examine the disability insurance program in the United States. A baseline calibration implies that the program lowers per capita consumption by 2.5%: 1/3 of this burden is caused by higher taxes and 2/3 comes from the change in economic behavior. However, precautionary savings are inefficient at insuring people against permanent disability: therefore, social insurance increases welfare. But, a perfect private insurance program would provide a 3.5-7% higher per capita consumption than the current disability insurance program.