Fundamentally Reforming the DI System: Evidence from German Notch Cohorts
Since 2001, cohorts born after 1960 are no longer eligible for public “Occupational Disability Insurance (ODI)” in Germany. ODI covers health shocks that prevent employees from working in their previous occupation. However, the affected “notch cohorts” are still insured by regular public DI, which covers work disability in any occupation. First, using administrative and survey data, we show that the reform significantly reduced the inflow of new DI beneficiaries by more than 30% in the long-run. Second, we study interaction effects with the private ODI market. Using representative data, we do not find much evidence that the notch cohorts purchased individual private ODI policies at significantly higher rates to compensate for the reduced generosity of the public DI system. To explain such low take-up, we employ a general equilibrium model featuring the roles of the social safety net, administrative costs, and asymmetric information. These driving forces help explain three stylized facts in the individual experience-rated private market for ODI policies: (1) low private ODI take-up and interaction effects with the public system—despite a high lifecycle work disability risk, (2) strong and positive income and health gradients in private ODI take-up, and (3) inversely related income and health gradients in work disability risk over the lifecycle. Simulations illustrate that policy reforms to lower administrative costs have the greatest potential to foster take-up and flatten its income and health gradients.
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