Financial Incentives and Disincentives for People with Disability

Abstract

One of the main objectives of current disability benefit reforms in all four countries is to increase incentives for persons with disability to take up, or to remain in, work. Disability and other public benefits are an important source of income for people with disability, especially in lower income groups. Nonetheless, the design of these benefits in combination with income taxation can create work disincentives. For instance, in a number of cases (Australia, United Kingdom and above-average income in Spain) disability benefits appear to be more attractive than unemployment benefits, which partly explains the frequent transitions from unemployment into disability. Disability benefits are also being used as a pathway into early retirement, particularly in Luxembourg and Spain. Finally, returning to work may be linked to high effective taxation: such “inactivity trap” exists in the United Kingdom. The other three countries are rather facing “low-wage traps”, as increasing working hours sometimes does not significantly increase incomes of workers with partially-reduced capacity. Recent and on-going benefit reforms reduce slightly the levels of benefit but do not necessarily decrease disincentive features embedded in the system. This is important in view of the low incomes of people with disability, especially in Australia and the United Kingdom, which are partly the result of comparatively low disability benefits in these countries.