All or Nothing: Health and the U.S. Social Security Disability Insurance Program (Job Market Paper)

Abstract

The Social Security Disability Insurance (SSDI) policy evaluates applicants’ health as a binary outcome and creates incentives to exaggerate or even exacerbate one’s health problems to acquire eligibility. Using Health and Retirement Study data and the Method of Simulated Moments, I estimate an individual decision-making model that allows the evaluation of the labor and health effects of changes in the SSDI design. Specifically, I focus on a modification that allows disability benefits for the partially disabled Americans aged between 51 and Social Security’s full retirement age. According to simulations, this reform will increase the labor supply of this age group by ∼6 p.p. and decrease their mortality rate by up to 0.1 p.p. Back-of-the-envelope calculations show that, thanks to the reform, ∼3 million Americans will postpone their retirement, and ∼40,000 Americans will have longer lives. After accounting for increased taxes, the investment required to prolong one person’s life by one year is ∼$17,000.