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 data from the Health and Retirement Study 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 nearly elderly. According to simulations, this reform will increase the labor supply of the nearly elderly by ∼5 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, ∼2 million partially disabled will postpone their retirement, and ∼30,000 Americans will have longer lives. After accounting for increased income taxes, the investment required to prolong one person’s life by one year is around $17,000.