Working Paper: NBER ID: w18869
Authors: Bruce D. Meyer; Wallace K.C. Mok
Abstract: Using longitudinal data for 1968-2009 for male household heads, we determine the prevalence of pre- retirement age disability and its association with a wide range of outcomes, including earnings, income, and consumption. We then employ some of these quantities in the optimal social insurance framework of Chetty (2006) to study current compensation for the disabled. Six of our findings stand out. First, disability rates are high. We divide the disabled along two dimensions based on the persistence and severity of their work-limiting condition. We estimate that a person reaching age 50 has a 36 percent chance of having been disabled at least temporarily once during his working years, and a 9 percent chance that he has begun a chronic and severe disability. Second, the economic consequences of disability are frequently profound. Ten years after disability onset, a person with a chronic and severe disability on average experiences a 79 percent decline in earnings, a 35 percent decline in after-tax income, a 24 percent decline in food and housing consumption and a 22 percent decline in food consumption. Third, economic circumstances differ sharply across disability groups. The outcome decline for the chronically and severely disabled is often more than twice as large as that for the average disabled head. Fourth, our findings show the partial and incomplete roles that individual savings, family support and social insurance play in reducing the consumption drop that follows disability. Fifth, time use and detailed consumption data further indicate that disability is associated with a decline in well-being. Sixth, using the quantities we have estimated, we provide the range of behavioral elasticities and preference parameters consistent with current disability compensation being optimal within the Chetty framework.
Keywords: disability; earnings; income; consumption
JEL Codes: H53; H55; I3; J22; J26; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disability onset (J14) | earnings decline (J31) |
| disability onset (J14) | after-tax income decline (H31) |
| disability onset (J14) | food and housing consumption decline (D12) |
| disability onset (J14) | food consumption decline (D12) |
| disability onset (J14) | consumption drops (E21) |
| disability onset (J14) | income decline (E25) |
| future disability (J14) | decline in earnings and income (E25) |
| savings and family support (D14) | mitigate consumption drops (E21) |
| disability (J14) | economic consequences (F69) |