Disability risk, disability insurance and life cycle behavior

Document type
Working Paper
Low, Hamish; Pistaferri, Luigi
Institute for Fiscal Studies
Date of publication
15 May 2010
IFS working paper; W10/11
Poverty Alleviation Welfare Benefits and Financial Inclusion, Disabled people
Social welfare
Material type

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This paper provides a life-cycle framework for weighing up the insurance value of disability benefits against the incentive cost. Within this framework, it estimates the life-cycle risks that individuals face in the US, as well as the parameters governing the disability insurance programme, using indirect inference and longitudinal data on consumption, disability status, disability insurance receipt, and wages. It uses the estimates to characterize the effectiveness of the disability insurance programme and to consider the effect on welfare and behaviour of policy reform. High levels of false rejections associated with the screening process imply welfare increases as the programme becomes less strict, despite the worsening incentives that this implies. Incentives for false applications are reduced by reducing generosity and increasing reassessments and these improve welfare, despite the worse insurance implied.

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