The Labor Supply Effects of Disability Insurance Work Disincentives: - - PowerPoint PPT Presentation

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The Labor Supply Effects of Disability Insurance Work Disincentives: Evidence from Administrative Data Nicole Maestas, RAND and Pardee RAND Graduate School Jae Song, SSA Retirement Research Consortium Conference August, 2010 MRRC Funding

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Nicole Maestas, RAND and Pardee RAND Graduate School Jae Song, SSA Retirement Research Consortium Conference August, 2010 MRRC Funding Gratefully Acknowledged (UM10-01)

The Labor Supply Effects of Disability Insurance Work Disincentives: Evidence from Administrative Data

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Introduction

 The causal effect of DI on labor force participation is hard to estimate

because all face same benefit schedule

 Bound (1989) used rejected applicants to establish upper bound for 1970’s  Chen and van der Klauuw (2008) use age-based discontinuities in eligibility

formulas to establish upper bound for 1990’s

 We use a little-studied interaction between DI and OA:

 DI benefits payable until FRA, at which point they automatically convert to

OA benefits

 No change in benefit amount, but SSA earnings test applies instead of strict

DI work rules

 Abrupt relaxation of implicit high marginal tax on earnings:



100,000% to 33% before 2000



100,000% to 0% after 2000

 If work disincentives binding, then we should observe an increase in

labor supply at FRA

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SSDI Work Rules

 Waiting Period

 Earnings must be below Substantial Gainful Activity (SGA)

threshold for 5 months prior to entitlement

 SGA threshold in 2010 is $1000/month

 Trial Work Period (TWP)

 Once entitled, beneficiaries can test ability to work

 Earnings unrestricted

 Once earnings exceed SGA for 12 months, benefits suspended for

all subsequent months when earnings exceed SGA

 Implicit marginal tax on average beneficiary of 100,000%

 Extended Period of Eligibility

 Benefits paid for months when earnings below SGA, for 3 years after

TWP

 If earning above SGA at end of 3 years, benefits terminated

 Expedited reinstatement for 5 years

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SSDI Budget Constraint

SSDI Benefit HSGA Hours Income

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Budget Constraint at Conversion

SSDI Benefit HSGA Hours Income

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Budget Constraint at Conversion

SSDI Benefit HSGA Hours Income

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SSDI Caseload by Diagnostic Group

500,000

1,000,000 1,500,000 2,000,000 2,500,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Musculoskeletal Circulatory Mental Disorders Nervous+Sense Unknown Respiratory Endocrine Injuries Neoplasms Mental Retardation Digestive Genito-Urinary Infect+Parasitic

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SSA Administrative Data

 All Primary Worker SSDI beneficiaries in 1995-2008  Born 1934 to 1943  In current pay status at the end of each year  Sample identified from Disabled Beneficiaries and

Dependents (DBAD) MBR Extracts

 Matched to Master Earnings File, 831 File, Master

Beneficiary Record

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Number of DI Beneficiaries in Birth Cohort by Age

50,000

100,000 150,000 200,000 250,000 300,000 350,000 400,000 60 61 62 63 64 65 66 67 68 69 70 Age 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943

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Fraction of DI Beneficiaries with Annual Earnings > $6,000

0.01 0.02 0.03 0.04 0.05 0.06 0.07 60 61 62 63 64 65 66 67 68 69 70 Age 1934 1935 1936 1937 1938 1939 1940 1941

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Mean Annual Earnings of DI Beneficiaries if Earnings > 0

2,000

4,000 6,000 8,000 10,000 12,000 14,000 60 61 62 63 64 65 66 67 68 69 70 Age 1934 1935 1936 1937 1938 1939 1940 1941 1942

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 Estimate change in labor supply as birth cohort

reaches their FRA

 Regression discontinuity estimator

 Regress individual labor supply outcome on series of

age dummies

 Coefficients of interest are for age 66 and age 67  Control for diagnostic group, year of birth, age at

entitlement, sex, PIA, education

 Assumes other factors trend smoothly through FRA

Research Design

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Regression-Adjusted Earnings by Age

(As Percent of Earnings at Age 60)

61 62 63 64 65 66 67 68 69 70 Age Percent of Age 60 Earnings All Worked at t-1

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Regression-Adjusted Earnings by Age and Diagnostic Group (Relative to Age 64)

Subsample with Recent Work Activity (Worked at t-1)

3000
2000
1000

1000 2000 3000 61 62 63 64 65 66 67 68 69 70 Age Annual Earnings Relative to Age 64 Mental Disorders Musculoskeletal Injuries Nervous+Sense Neoplasms

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Conclusion

 DI recipients respond to changes in work incentives  Evidence of some untapped work capacity among even

the oldest DI beneficiaries

 About 20-25% of caseload is ages 60-65 during 1992-

2006

 Our results are likely a lower bound estimate of the

work capacity of all DI beneficiaries

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Extra Slides

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Figure 3. Age Profile in Labor Force Participation by DI Status at Age 63-64

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 59-60 61-62 63-64 65-66 67-68 69-70 Age % Working if On DI at 63-64 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 % Working if Not On DI at 63-64 On DI at Ages 63-64 Not On DI at Ages 63-64

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Table 6. Adjusted DD Estimates of Effect of Relaxing DI Work Disincentive on Hours, Weeks, and Earnings ΔHours per ΔWeeks per ΔWorks ΔAnnual Δ(Earnings>= Week Year Full-Time Earnings SGA) 4.288** 5.093** 0.080** 3,005.699** 0.072** (0.414) (0.479) (0.008) (416.312) (0.009) ΔDemographics X X X X X ΔNet Worth and ΔIncome X X X X X ΔHealth Status X X X X X ΔHealth Insurance Coverage X X X X X Covariates Fully Interacted with Treatment X X X X X Multiple Pre-/Post Periods X X X X X Mean for DI Participants at 63-64 1.135 1.603 0.016 754.518 0.025

No. Obs

29083 28976 29611 29642 29642