Social Support Substitution and the Earnings Rebound: Evidence from a Regression Discontinuity in Disability Insurance Reform

Abstract

In this paper, we exploit a cohort discontinuity in the stringency of the 1993 Dutch disability reforms to obtain causal estimates of the effects of decreased generosity of disability insurance (DI) on behavior of existing DI recipients. We find evidence of substantial “social support substitution”: individuals on average offset a euro of lost DI benefits by collecting 31 cents more from other social assistance programs. This benefit-substitution effect declines somewhat over time, but is still a significant 20% eight years later. Individuals also exhibit a strong rebound in earnings: labor earnings increase by 62 cents on average per euro of lost DI benefits. This is novel evidence of substantial remaining earnings capacity in a sample of long-term claimants of DI. On average, individuals make up for almost the entire DI benefit reduction through increases in other forms of social assistance and in labor earnings.