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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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    File URL: https://economicdynamics.org/meetpapers/2011/paper_445.pdf
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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
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    Handle: RePEc:red:sed011:445
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    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/
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