Household Self-Insurance and the Value of Disability Insurance in the United States
91 Pages Posted: 18 Aug 2022 Last revised: 10 Jan 2023
Date Written: December 19, 2022
While the U.S. Disability Insurance (DI) system is large in terms of fiscal costs and beneficiary rolls, its interactions with household self-insurance mechanisms are not well-understood. In addition to crowding out the insurance value of DI, household self-insurance may drive negative selection into DI by reducing the implicit costs that stem from its lengthy application process. Allowing for such interactions in a rich life cycle model, this paper finds that revenue-neutral expansionary DI reforms do not necessarily improve welfare, as benefits often accrue to negatively-selected individuals with stronger self-insurance capacity. However, an asset test can reduce negative selection on the basis of household self-insurance capacity, so much so that expansionary reforms become welfare-improving. Finally while household self-insurance crowds out the value of different kinds of DI expansions, abstracting away from insurance value can still lead to erroneous conclusions regarding their overall and relative welfare effects.
Keywords: Disability insurance, welfare value, negative selection, household self-insurance, asset tests
JEL Classification: D15, I38, J14, H55, J22
Suggested Citation: Suggested Citation