Abstract

AbstractDisability insurance provides protection against health shocks that limit the ability to work. In most countries, these programmes are large and growing, both in expenditure and in number of recipients. We discuss the traditional trade‐off between insurance and incentives in providing this insurance, with a focus on the US and UK experiences. There is substantial evidence on the extent of the labour supply incentive costs of disability insurance, but there has been a lack of evidence on the insurance value until very recently. Further, evidence on errors in the disability insurance process suggests false rejections of genuine claimants is a substantial problem, and these are more serious than false acceptances of healthy applicants. We provide a life‐cycle framework for understanding the trade‐offs and to evaluate the welfare implications of policy reforms. We argue that reforms should be focused on reducing false rejections and supporting labour market attachment. The difficulty in considering reform is that the design of disability insurance has many aspects that interact and impact on outcomes.

Highlights

  • Disability insurance is a key part of social insurance provision across the OECD

  • Most of the difficulties involved in the screening process arise because disability involves a mixture of medical, psychological and social difficulties, and it may be extremely hard to make a correct decision even with rich medical information. This is especially true when the decision has to be of the reject/award type rather than deciding how fractionally disabled a person is. Another difficulty is that given the low exit rates from the programme, disability insurance (DI) acts effectively as insurance against permanent shocks: it meets demand for protection against long-term unemployment or productivity declines that cannot be satisfied by other social insurance programmes, which are temporary by design

  • Given the accumulating evidence on the distortions induced by increasing the generosity of disability insurance, as well as the undeniable importance of insurance for those who are genuinely hit by disability shocks, we conclude this survey with a discussion of the policy implications of potential reforms

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Summary

Introduction

Disability insurance is a key part of social insurance provision across the OECD. It provides insurance against extreme health shocks that prevent individuals from working. At the heart of these questions is the issue of the trade-off between providing coverage for individuals who are genuinely in need and avoiding giving benefits to those who are healthy and able to work The aim of this survey is to discuss recent empirical evidence on the different sides of this trade-off and to provide a framework for thinking about its economic and policy implications. This is especially true when the decision has to be of the reject/award type (as in the US) rather than deciding how fractionally disabled a person is (as in Italy or in the US veterans’ disability programme) Another difficulty is that given the low exit rates from the programme, DI acts effectively as insurance against permanent shocks: it meets demand for protection against long-term unemployment or productivity declines that cannot be satisfied by other social insurance programmes (such as UI), which are temporary by design.

Institutional detail and statistics
The scale of disability programmes
Dimensions of policy
Other countries
Empirical evidence on the insurance–incentive trade-off
Incentive effects of disability insurance
Organising framework: insurance and incentives
Modelling disability insurance
Measurement issues
Policy implications
Medical tests and stringency
Eligibility requirements
Generosity and progressivity
Reassessment and the return to work
Findings
Concluding thoughts
Full Text
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