Disability Risk, Disability Insurance and Life Cycle Behavior
This paper provides a life-cycle framework for weighing up the insurance value of disability benefits against the incentive cost. Within this framework, we estimate the life-cycle risks that individuals face in the US, as well as the parameters governing the disability insurance program, using indirect inference and longitudinal data on consumption, disability status, disability insurance receipt, and wages. We use our estimates to characterize the economic effects of disability programs and to consider how policy reforms would affect behaviour and standard measures of household welfare. Because of high levels of false rejections associated with the screening problem, average household welfare increases as the program becomes less strict, despite the worsening incentives that this implies. Incentives for false applications are reduced by reducing generosity and increasing reassessments and these policies also increase average household welfare, despite the worse insurance implied.
Low thanks funding from the ESRC as a Research Fellow, grant number RES-063-27-0211. Pistaferri thanks funding from NIH/NIA under grant 1R01AG032029-01 and from NSF under grant SES-0921689. We have received useful comments from audiences at various conferences and departments in Europe and the US. We are especially grateful to Tom Crossley, Costas Meghir and Aleh Tsyvinski for detailed comments, and to Katja Kaufmann and Itay Saporta for research assistance. All errors are our own. The views expressed herein are those of the authors and do not necessarily mreflect the views of the National Bureau of Economic Research.