TY  - JOUR
AU  - Chandra,Amitabh
AU  - Samwick,Andrew A.
TI  - Disability Risk and the Value of Disability Insurance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11605
PY  - 2005
Y2  - September 2005
UR  - http://www.nber.org/papers/w11605
L1  - http://www.nber.org/papers/w11605.pdf
N1  - Author contact info:
Amitabh Chandra
John F. Kennedy School of Government
Harvard University
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-7356
E-Mail: amitabh_chandra@harvard.edu

Andrew Samwick
6106 Rockefeller Hall
Department of Economics
Dartmouth College
Hanover, NH 03755-3514
Tel: 603/646-2893
Fax: 603/646-2122
E-Mail: andrew.samwick@dartmouth.edu
M1  - published as Amitabh Chandra, Andrew A. Samwick. "Disability Risk and the Value of Disability Insurance," in David M. Cutler and David A. Wise, editors, "Health at Older Ages: The Causes and Consequences of Declining Disability among the Elderly" University of Chicago Press (2008)

M2  - featured in NBER digest on 2005-09-19
AB  - We estimate consumers%u2019 valuation of disability insurance using a stochastic lifecycle framework in
which disability is modeled as permanent, involuntary retirement. We base our probabilities of worklimiting disability on 25 years of data from the Current Population Survey and examine the changes in the disability gradient for different demographic groups over their lifecycle. Our estimates show that a typical consumer would be willing to pay about 5 percent of expected consumption to eliminate the average disability risk faced by current workers. Only about 2 percentage points reflect the impact of disability on expected lifetime earnings; the larger part is attributable to the uncertainty associated with the threat of disablement. We estimate that no more than 20 percent of mean assets accumulated before voluntary retirement are attributable to disability risks measured for any demographic group in our data.  Compared to other reductions in expected utility of comparable amounts, such as a reduction in the replacement rate at voluntary retirement or increases in annual income fluctuations, disability risk generates substantially less pre-retirement saving. Because the probability of disablement is small and the average size of the loss %u2014 conditional on becoming disabled %u2014 is large, disability risk is not effectively insured through precautionary saving.
ER  -