Occupational Hazards and Social Disability Insurance
FRB of St. Louis Working Paper No. 2014-024A
39 Pages Posted: 27 Aug 2014
Date Written: August 26, 2014
Lifetime occupational exposure accounts for 42% of differences in disability risk across individuals. Incorporating this feature into a general equilibrium model, we study how social disability insurance (SDI) affects welfare through (i) the classic channel of risk-sharing and (ii) a new channel of occupational reallocation. Both channels can increase welfare, but at the optimal SDI they are at odds. Welfare gains from additional risk-sharing are reduced by overly incentivizing workers to choose risky occupations. In a calibrated economy resembling the United States, SDI increases welfare by 2.6% (consumption) relative to actuarially fair insurance. The current US system captures 92% of these gains.
Keywords: Disability Insurance, Occupational Choice, Optimal Policy
JEL Classification: E62, I13
Suggested Citation: Suggested Citation