Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms

45 Pages Posted: 30 Jun 2000 Last revised: 23 Jul 2021

See all articles by Hilary Williamson Hoynes

Hilary Williamson Hoynes

University of California, Berkeley; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Robert A. Moffitt

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1997

Abstract

The Social Security Disability Insurance (SSDI) Program has long been criticized by economists for its apparent work disincentives stemming from the imposition of 100-percent tax rates on earnings. However, the program has been modified in recent years to allow recipients to keep some of their earnings for fixed periods of time. Moreover, additional proposals have been made for lowering the tax rate further and for providing various additional financial work incentives. We use the basic labor supply model to show the expected effect of these reforms on work effort. In addition, we provide a numerical simulation that shows the magnitude of the monetary incentives provided by the reforms for different categories of individuals. We find that the proposed reforms have ambiguous effects on work effort and could, contrary to perceived wisdom, possibly reduce work effort and increase the number of SSDI recipients. However, the simulations show that reforms based on earnings subsidies for private employers are more likely to increase work effort and to lower the caseload.

Suggested Citation

Hoynes, Hilary Williamson and Moffitt, Robert, Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms (June 1997). NBER Working Paper No. w6058, Available at SSRN: https://ssrn.com/abstract=226468

Hilary Williamson Hoynes (Contact Author)

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Robert Moffitt

Johns Hopkins University - Department of Economics ( email )

Baltimore, MD 21218-2685
United States
410-516-7611 (Phone)
410-516-7600 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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