Working Paper: CEPR ID: DP4773
Authors: Helmuth Cremer; Jean-Marie Lozachmeur; Pierre Pestieau
Abstract: This Paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labour force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labour and cannot be distinguished. They are not, however, counted in the same way in social welfare. Benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions that may be induced in the individuals? retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants, nor to apply testing to all types of benefits. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.
Keywords: disability; social security; retirement
JEL Codes: H55; I12; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disability testing (J14) | social welfare (I38) |
| disability testing (J14) | participation rate of elderly workers (J26) |
| leisure-prone individuals exploit disability insurance (J14) | lower retirement ages (J26) |
| leisure-prone individuals exploit disability insurance (J14) | reduced disability benefits (H55) |
| testing uniformly across benefits (C90) | not optimal (H21) |
| second-best solution (H21) | later retirement age for disabled individuals (J26) |
| disability testing (J14) | tailored benefits (J32) |