Disability Shocks, Disability Insurance, and Life Cycle Behavior

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DESCRIPTION (provided by applicant): The goal of this research project is to provide a framework for understanding how disability risk and the features of the Disability Insurance (DI) program in the US affect individual consumption and labor supply behavior in an explicit life-cycle setting. We want to use this framework to analyze behavior in alternative economic environments. Our preliminary data analysis is based on data from 1987-2005 PSID. We plan to integrate it with data from other surveys. The recent increase in the proportion of DI claimants and the proportion of Social Security spending taken up by the DI program have renewed the calls for a redesign of the program aimed at reducing benefits generosity, increasing strictness in the definition of disability, and in general reducing the extent of "moral hazard" - i.e., the existence of undeserving individuals being admitted into the program. The existing empirical literature has found convincing evidence of such effects (i.e., as a positive effect of DI benefits on DI application or labor market participation). Given the trade-off between insurance and incentives, it's not clear that a reduction in benefits generosity or an increase in screening stringency (which lowers moral hazard) is necessarily welfare enhancing. We want to improve on current studies. Most empirical papers take a reduced form approach that make addressing this question difficult. The existing structural papers are based on very simplified frameworks. We propose a theoretical framework that is rich enough to allow relaxing the strong assumptions made in the literature. We will use our model to evaluate the welfare effect of various program changes: (a) Increasing the "strictness" of the disability test; (b) Changing the probability of re-assessment; (c) Changing the progressivity of DI payments; (d) reducing the cost of work for the disabled. Others will be considered. The ability to evaluate the welfare effect of these changes has important policy implications. They have been explicitly considered as possible solutions to the moral hazard problem underlying the expansion of DI rolls of the last two decades. The forecast expansion of DI has important implications for the future of the Social Security system as a whole and for its long-term sustainability. PUBLIC HEALTH RELEVANCE: The goal of this research project is to provide a consistent framework for understanding how disability risk and the features of the Disability Insurance (DI) program in the US affect individual consumption and labor supply behavior in an explicit life-cycle setting. Our framework can be used to assess the effectiveness of proposed reforms of the DI program, such as changing the strictness of the tests used to assess disability, changing the probability of re-assessment for DI, changing the progressivity of the formula used to compute DI benefits, introducing an asset test for DI eligibility, and reducing the cost of work for the disabled and/or increasing the arrival rate of job offers for DI beneficiaries. Given the growing proportion of people claiming DI and the proportion of Social Security spending taken up by the DI program, this project has clear public health relevance.