The Welfare Implications of Increasing Disability Insurance Benefit Generosity

73 Pages Posted: 8 Oct 2002 Last revised: 9 Jul 2021

See all articles by John Bound

John Bound

University of Michigan; National Bureau of Economic Research (NBER)

Julie Berry Cullen

University of California, San Diego (UCSD) - Department of Economics; National Bureau of Economic Research (NBER)

Austin Nichols

University of Michigan at Ann Arbor - Department of Economics

Lucie Schmidt

Smith College; National Bureau of Economic Research (NBER)

Date Written: September 2002

Abstract

The focus on efficiency costs in the empirical literature on Disability Insurance (DI) provides a misleading view of the adequacy of payment levels. In order to evaluate whether workers are over- or under-insured through the social insurance program, we develop a framework that allows us to simulate the benefits as well as the costs associated with marginal changes in payment generosity from a representative cross-sectional sample of the population. Under the assumption that individuals are reasonably risk averse, our simulations suggest the typical worker would value increased benefits somewhat above the average costs of providing them. However, we find that benefit increases tend to lower average utility when we average across all individuals in our sample, particularly at high levels of risk aversion. This counterintuitive finding arises because some lower income DI-insured workers face replacement rates that are near or above one. For such individuals, a benefit increase would represent transfers from an even lower income state of the world in which they are not on DI to one in which they are, a transfer that would not be beneficial even if there were no behavioral distortions associated with the provision of DI benefits.

Suggested Citation

Bound, John and Berry Cullen, Julianne (Julie) and Nichols, Austin and Schmidt, Lucie, The Welfare Implications of Increasing Disability Insurance Benefit Generosity (September 2002). NBER Working Paper No. w9155, Available at SSRN: https://ssrn.com/abstract=330988

John Bound (Contact Author)

University of Michigan ( email )

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Julianne (Julie) Berry Cullen

University of California, San Diego (UCSD) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Austin Nichols

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Lucie Schmidt

Smith College ( email )

Northampton, MA 01060
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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