Social Security Programs and Retirement around the World: Disability Insurance Programs and Retirement
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Social Security Programs and Retirement around the World: Disability Insurance Programs and Retirement
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Overview
The sixth stage of an ongoing research project studying the relationship between social security programs and labor force participation, this volume draws on the work of an eminent group of international economists to consider the extent to which differences in labor force participation across countries are determined by the provisions of disability insurance programs. Presented in an easily comparable way, their research covers twelve countries, including Canada, Japan, and the United States, and considers the requirements of disability insurance programs, as well as other pathways to retirement.
Product Details
| ISBN-13: | 9780226262604 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 01/13/2016 |
| Series: | National Bureau Economic Research |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 548 |
| File size: | 54 MB |
| Note: | This product may take a few minutes to download. |
About the Author
Read an Excerpt
Social Security Programs and Retirement Around the World
Disability Insurance Programs and Retirement
By David A. Wise
The University of Chicago Press
Copyright © 2016 National Bureau of Economic ResearchAll rights reserved.
ISBN: 978-0-226-26260-4
CHAPTER 1
Disability Insurance Incentives and the Retirement Decision
Evidence from the United States
Courtney Coile
1.1 Introduction
The rolls of the US Disability Insurance (DI) program have risen dramatically since the program's inception in 1956. Over the past two decades, the share of the population age twenty-five to sixty-four receiving DI benefits more than doubled, from 2.3 percent in 1989 to 5.1 percent in 2012 (Figure 1.1). The growth of the program is likely to continue, stabilizing at 7 percent of the nonelderly population, according to one projection (Autor and Duggan 2006a). The rising number of DI beneficiaries has jeopardized the program's ability to pay benefits, with annual benefit expenditures reaching $140 billion in 2012 and the DI trust fund projected to be depleted by 2016. As the trustees of the program recently warned, "lawmakers need to act soon to avoid reduced payments to DI beneficiaries three years from now" (OASDI Trustees 2013).
Concerns about the DI program have been amplified by the observation that the program's growth does not appear to be driven by worsening population health. Over the period that DI participation doubled, the fraction of people reporting themselves to be in poor health or suffering from a work-limiting health problem was unchanged, if not declining (Milligan 2012; Duggan and Imberman 2008). These trends have led to renewed interest in understanding the causes of the rise in the DI rolls, as well as its consequences. The effect of DI on labor supply has been a subject of interest since Bound (1989, 1991) and Parsons (1991) reached different conclusions from comparisons of the earnings of accepted and rejected DI applicants. More recent work by Maestas, Mullen, and Strand (2013), French and Song (2012), and Chen and van der Klaauw (2008) has made use of plausibly exogenous variation in DI receipt coming from random assignment of DI applicants to medical examiners or similar sources.
This study takes a different approach to exploring the effect of the DI program on labor supply, specifically labor force withdrawal or retirement. The methodology employed here builds on Coile and Gruber (2004, 2007), who construct several measures of the financial incentives for additional work arising from the structure of the Social Security (SS) program. One measure is the "option value" (OV), which captures the gain in utility resulting from retiring at the optimal future date, over and above the utility available by retiring today. Those studies find that having a larger financial incentive for continued work is associated with a reduced probability of retirement. However, these studies ignore the DI program, treating Social Security (and private pensions) as the only possible pathway to retirement.
In the current study, I construct an "inclusive" option value measure that incorporates the financial incentives arising from both SS and DI, and estimate models that relate this new measure to the retirement transitions of workers age fifty to sixty-nine, using data from the Health and Retirement Study (HRS). To explore the effect of incentives on retirement conditional on health, I control for health using an index developed in Poterba, Venti, and Wise (2013). I explore whether the effect of incentives on retirement varies by health and education, both of which are strongly related to the probability of DI receipt. Finally, to put the magnitude of the findings into context and gauge the relevance of DI to retirement decisions, I use the regression estimates to simulate the effect of reducing access to DI.
I have several key findings. First, the probability of DI receipt is strongly linked to education, even conditional on health. Second, the inclusive OV measure has a negative and significant effect on the probability of retirement; the effect is robust to choice of specification and varies by education and health. Finally, the simulations suggest that reducing access to DI would have large effects on the labor force participation of DI applicants.
The remainder of the chapter is structured as follows. In the next section, I provide background on the US DI program and the past literature on DI and labor supply. Next, I describe the empirical strategy, notably how the inclusive OV measure is constructed, as well as the data used. I present descriptive statistics on the probability of DI receipt, and then present the main regression results. I conclude with a simulation of the effect of reducing access to DI and a discussion of the implications of the findings.
1.2 Background
1.2.1 Institutional Features of Social Security and Disability Insurance
Disability insurance in the United States is part of the Social Security program. Eligibility for DI and the calculation of DI benefits is similar to that for SS, with a few key differences.
Workers become eligible for Social Security retired worker benefits after ten years (forty quarters) of covered employment, which now encompasses most sectors of the economy. Benefits are determined by first calculating the Average Indexed Monthly Earnings (AIME), an average of the individual's highest thirty-five years of earnings, indexed by a national wage index. Next, a progressive linear formula is applied to the AIME to get the primary insurance amount (PIA), where ninety cents of the first dollar of earnings is converted to benefits but only fifteen cents of the last dollar. Finally, the PIA is multiplied by an adjustment factor for claiming before or after the normal retirement age ([NRA]; currently sixty-six, but rising slowly to sixty-seven for those born in 1960 or later) to obtain the monthly benefit amount. Benefits are first available at age sixty-two but may be claimed as late as age seventy, and the adjustment factor for early or delayed claiming is considered to be roughly actuarially fair. Before the NRA, workers face an earnings test if their earnings exceed a threshold amount, $15,480, in 2014. Benefits are available for spouses and survivors of retired workers, though a spouse who is also qualified for retired worker benefits receives only the larger of the benefits to which she (or he) is entitled. For the median earner, the Social Security replacement rate is 47 percent of average lifetime earnings (Biggs and Springstead 2008).
While receipt of retired worker benefits upon claiming is automatic for an insured worker, the DI application process is more complex. First, in order to be disability insured, a worker must meet both "recent work" and "duration of work" tests, working in at least five of the last ten quarters (less if disabled by age thirty) and for up to forty quarters over the worker's lifetime (depending on age at disability). An insured worker applying for DI must be determined to have a disability, defined as the "inability to engage in substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months." The review of a DI application can be a lengthy, multistep process — the initial decision is made by an examiner at a state disability determination (DDS) office, but denied applicants have up to four levels of appeal available to them. One recent study found that although only one-third of applicants were allowed in the initial determination, nearly two-thirds were ultimately awarded benefits (Maestas, Mullen, and Strand 2013). Successful DI applicants begin receiving benefits five months after disability onset, and are eligible for Medicare after two years. Beneficiaries who earn more than the SGA threshold, $1,070 per month in 2014, lose DI eligibility.
The disability screening process has been subject to changes over time. In the late 1970s, DDS offices tightened medical eligibility criteria in response to growing DI enrollments, resulting in a sharp increase in initial denial rates (Gruber and Kubik 1997). A 1980 law increased the number of "continuing disability reviews" (CDRs), leading to the termination of benefits for 380,000 individuals over the next three years (Rupp and Scott 1998). These actions generated a public backlash that led Congress to enact new legislation in 1984. While the new law did not change the statutory definition of disability, it shifted the focus of screening from medical to functional criteria, instructing examiners "to place significant weight on applicants' reported pain and discomfort, to relax its strict screening of mental illness and to consider multiple nonsevere ailments (impairments) as constituting a disability during the initial determination decision, even if none of these impairments was by itself disabling" (Autor and Duggan 2006b, 8). The 1984 law also put more weight on medical evidence provided by applicants' own health care provider and less on that from the Social Security Administration's medical examination.
Several differences between SS retired workers and DI benefits are relevant for the discussion of financial incentives below. First and foremost, DI benefits are available (to a successful applicant) from the age of disability onset, while retired worker benefits are available only starting at age sixty-two. Second, DI benefits are not subject to reduction for early claiming; thus, a worker claiming retired worker benefits at age sixty-two would receive 75 percent of their PIA (based on current rules), while a worker who was awarded DI benefits at age sixty-two (or any other age) would receive 100 percent of their PIA. Finally, there are some small technical differences in the calculation of the two benefits, such as a lower number of years of earnings and different indexing year (both due to the shorter career) used in the calculation of the AIME and PIA for DI benefits.
1.2.2 Relevant Past Literature
This chapter, like nearly any study of the US DI program, is motivated at least in part by the growth over time in DI enrollments, and thus the literature exploring the reasons for this trend is of interest. Changes in the stringency of medical screening are clearly one important factor. As figure 1.1 illustrates, fluctuations in DI enrollment over time match up with the dates of screening changes, with the DI participation rate falling by 20 percent between 1977 and 1984 (from 2.8 percent of the nonelderly population to 2.2 percent) following the initial tightening of eligibility criteria and increase in CDRs and rising again sharply following the 1984 law. The composition of the DI population has also shifted dramatically in the past two decades, with the number of beneficiaries with musculoskeletal and mental disorders growing by over 300 percent while the number with cancer and heart disease grew by only 30 percent; the explosive growth in the former group is consistent with the 1984 law's relaxed screening of mental illness and greater emphasis on pain and workplace function (Autor and Duggan 2006a).
Economic and demographic factors have also been put forward as possible explanations for the time-series trend. Autor and Duggan (2003) point out that the value of DI relative to potential labor market earnings has risen since the late 1970s because of the interaction between the DI benefit formula and rising income inequality, whereby DI benefits become relatively more generous if an individual's earnings growth lags behind the average growth of earnings in the economy. Over the past two decades the increase in DI enrollment has been largest for those without a high school degree, consistent with their weakening position in the economy (Katz and Autor 1999). Another potential explanation is rising women's labor force participation, which has made more women eligible for DI. As illustrated below, women's DI participation rates rose more rapidly over this period than did men's, lending some credence to this theory; however, Autor and Duggan (2006a) estimate that increased attachment to the labor force explains only one-sixth of the increase in women's DI participation over time, suggesting that other factors may matter more. Finally, as mentioned above, changes in health do not appear to be a major driver of the growth in DI enrollment, since mortality rates have fallen over time while other health measures have generally been either flat or improving.
A second strand of the literature that is highly relevant for the present analysis concerns the effect of the DI program on labor supply. The long-term decline in the labor force participation of older men that began after the end of World War II (before stabilizing and ultimately reversing starting in the early 1990s) coincided with the rapid growth of the DI program in its first two decades of existence, prompting analysts to explore the effect of DI on men's labor force participation as far back as Parsons (1980). Estimating the effect of the DI program on labor supply is difficult because the counterfactual — how much DI recipients would have worked in the absence of the DI program — is unobservable. Comparing the labor force participation of DI recipients with that of the population at large is fraught because DI recipients are in worse health and may differ in other unobservable ways, introducing bias in the estimation.
Bound (1989) offers a novel solution, using the postdecision earnings of rejected DI applicants as an upper bound estimate of the work capacity of successful applicants, the former group presumably being in better health than the latter. Finding that rejected DI applicants had labor force participation rates of less than 50 percent, Bound concludes that the work capacity of successful applicants is low. Subsequent papers (Parsons 1991; Bound 1991) have raised and debated potential problems with this approach. Rejected applicants may need to remain out of the labor force for years to avoid jeopardizing their appeals and may also suffer depreciation of human capital due to the interruption in their work career (which would not occur in the absence of a DI program). Lahiri and Wixon (2008) found that rejected DI applicants also tend to have intermittent work histories, further calling into question their use as a comparison group.
More recent contributions to this literature have surmounted the usual endogeneity problem by identifying plausibly exogenous sources of variation in DI receipt. Maestas, Mullen, and Strand (2013) exploit variation in the allowance rates of DI examiners at the initial stage in the DI determination process. They find that among the roughly one-quarter of applicants on the margin of program entry, employment would have been nearly 30 percentage points higher in the absence of DI benefits. These effects are heterogeneous, ranging from no effect for the most impaired to a 50 percentage point effect for the least impaired. French and Song (2012) employ a similar methodology, using variation that arises from random assignment of DI cases to administrative law judges, a later stage in the DI determination process. Chen and van der Klaauw (2008) employ a regression discontinuity approach based on discrete changes in eligibility standards at various ages (e.g., age fifty-five) that are codified in the Medical-Vocational Guidelines and used for applicants when a disability determination cannot be made on medical grounds alone. The latter two papers obtain estimates roughly similar to those of Maestas, Mullen, and Strand (2013). Gruber (2000) differs slightly from the other papers in this group in that he focuses on the generosity of DI benefits. Making use of a differential increase in benefits in Quebec versus the rest of Canada in the 1980s to estimate a differences-in-differences model, he finds an elasticity of labor force nonparticipation with respect to DI benefits in the range of 0.3.
(Continues...)
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Table of Contents
AcknowledgmentsIntroduction
Courtney Coile, Kevin Milligan, and David A. Wise
1.Disability Insurance Incentives and the Retirement Decision: Evidence from the United States
Courtney Coile
2.Effect of Pensions and Disability Benefits on Retirement in the United Kingdom
James Banks, Carl Emmerson, and Gemma Tetlow
3.Option Value of Disability Insurance in Canada
Kevin Milligan and Tammy Schirle
4.Health Status, Disability, and Retirement Incentives in Belgium
Alain Jousten, Mathieu Lefebvre, and Sergio Perelman
5. Health, Disability Insurance, and Labor Force Exit of Older Workers in the Netherlands
Adriaan Kalwij, Klaas de Vos, and Arie Kapteyn
6. Retirement, Early Retirement, and Disability: Explaining Labor Force Participation after Fifty-Five in France
Luc Behaghel, Didier Blanchet, and Muriel Roger
7. Health, Financial Incentives, and Early Retirement: Microsimulation Evidence for Germany
Hendrik Jürges, Lars Thiel, Tabea Bucher-Koenen, Johannes Rausch, Morten Schuth, and Axel Börsch-Supan
8.Health, Disability Insurance, and Retirement in Denmark
Paul Bingley, Nabanita Datta Gupta, Michael Jørgensen, and Peder J. Pedersen
9.Pathways to Retirement and the Role of Financial Incentives in Sweden
Per Johansson, Lisa Laun, and Mårten Palme
10. Health Status, Disability Insurance, and Incentives to Exit the Labor Force in Italy: Evidence from SHARE
Agar Brugiavini and Franco Peracchi
11. Financial Incentives, Health, and Retirement in Spain
Pilar García-Gómez, Sergi Jiménez-Martín, and Judit Vall Castelló
12.Option Value of Work, Health Status, and Retirement Decisions in Japan: Evidence from the Japanese Study on Aging and Retirement (JSTAR)
Satoshi Shimizutani, Takashi Oshio, and Mayu Fujii
Contributors
Author Index
Subject Index