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On the costs of disability insurance

  • Tomi T. Kortela

    (University of Turku)

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    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.

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    Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 445.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:red:sed011:445
    Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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    9. Mikhail Golosov & Aleh Tsyvinski, 2004. "Designing Optimal Disability Insurance: A Case for Asset Testing," NBER Working Papers 10792, National Bureau of Economic Research, Inc.
    10. Bound, John & Burkhauser, Richard V., 1999. "Economic analysis of transfer programs targeted on people with disabilities," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 51, pages 3417-3528 Elsevier.
    11. Christopher D. Carroll & Patrick Toche, 2009. "A Tractable Model of Buffer Stock Saving," NBER Working Papers 15265, National Bureau of Economic Research, Inc.
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    13. Huggett, Mark & Ospina, Sandra, 2001. "Aggregate precautionary savings: when is the third derivative irrelevant?," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 373-396, October.
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    16. Sheshinski, E. & Diamond, P., 1992. "Economic Aspects of Optimal Disability Benefits," Working papers 92-5, Massachusetts Institute of Technology (MIT), Department of Economics.
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