Disability Risk and the Value of Disability Insurance

Abstract

We provide a lifecycle framework for comparing the insurance value of disability benefits and the incentive cost. We estimate the risks that individuals face and the parameters governing the disability insurance program using longitudinal US data on consumption, health, disability insurance, and wages. We characterize the economic effects of disability insurance and study how policy reforms impact behavior and house-hold welfare. Because of high rejections rates of disabled applicants, welfare increases as the program becomes less strict, despite the worsening of incentives. False applications decline when reducing generosity and increasing reassessments; these policies increase welfare, despite the decline in insurance.

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