NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Disability, Earnings, Income and Consumption

Bruce D. Meyer, Wallace K.C. Mok

NBER Working Paper No. 18869
Issued in March 2013
NBER Program(s):   AG   HC   HE   LS   PE

Using longitudinal data for 1968-2009 for male household heads, we determine the prevalence of pre- retirement age disability and its association with a wide range of outcomes, including earnings, income, and consumption. We then employ some of these quantities in the optimal social insurance framework of Chetty (2006) to study current compensation for the disabled. Six of our findings stand out. First, disability rates are high. We divide the disabled along two dimensions based on the persistence and severity of their work-limiting condition. We estimate that a person reaching age 50 has a 36 percent chance of having been disabled at least temporarily once during his working years, and a 9 percent chance that he has begun a chronic and severe disability. Second, the economic consequences of disability are frequently profound. Ten years after disability onset, a person with a chronic and severe disability on average experiences a 79 percent decline in earnings, a 35 percent decline in after-tax income, a 24 percent decline in food and housing consumption and a 22 percent decline in food consumption. Third, economic circumstances differ sharply across disability groups. The outcome decline for the chronically and severely disabled is often more than twice as large as that for the average disabled head. Fourth, our findings show the partial and incomplete roles that individual savings, family support and social insurance play in reducing the consumption drop that follows disability. Fifth, time use and detailed consumption data further indicate that disability is associated with a decline in well-being. Sixth, using the quantities we have estimated, we provide the range of behavioral elasticities and preference parameters consistent with current disability compensation being optimal within the Chetty framework.

A non-technical summary of this paper is available in the 2013 number 1 issue of the NBER Bulletin on Aging and Health. You can sign up to receive the NBER Bulletin on Aging and Health by email.

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A data appendix is available at http://www.nber.org/data-appendix/w18869

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18869

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