Disability insurance and the effects of return-to-work policies

Abstract

I provide a quantitative assessment of the labor market and welfare effects of return-to-work policies targeted at disability insurance (DI) recipients. I do so by estimating a life-cycle model in which individuals with different health evolving over time choose consumption, labor supply, and DI application. I find that a wage subsidy incentivizing return to work is welfare improving, and the willingness to pay for such reform is increasing in sickness and decreasing in wealth. This policy increases labor force participation of DI beneficiaries by 4.6 percentage points, and decreases the DI rate by 5.7 percentage points. A policy mandating a 10% yearly eligibility reassessment would decrease the welfare of individuals in bad health and poor economic condition, and force about 30% of the beneficiaries to exit the program, 54% of whom would return to work.