Designing Optimal Disability Insurance: A Case for Asset Testing

Mikhail Golosov · Aleh Tsyvinski

85 citations0/0 files storedNational Bureau of Economic Research

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Retirement, Disability, and Employment Economic and Fiscal Studies Financial Literacy, Pension, Retirement Analysis

Abstract

The paper analyzes an implementation of an optimal disability insurance system as a competitive equilibrium with taxes.The problem is modeled as a dynamic mechanism design problem in which disability is unobservable.We show that an asset-tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum implements the optimum.The logic behind the result is as follows: we show that an agent who falsely claims disability has higher savings than a truly disabled agent, and an asset test prevents false claimants from receiving disability.We also evaluate welfare benefits of asset testing.For a calibrated economy, we numerically compare the optimal system to the best system without asset testing.We find that gains of asset testing are significant and equal to about 0.65% of consumption.

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References

1995Precautionary Saving and Social Insurance 1994Precautionary Saving and Social Insurance 2015Americans with Disabilities 2002Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses 1975The Allocation of Time and Goods over the Life Cycle 1997Optimal Unemployment Insurance 1976Optimal tax theory 2003Optimal Indirect and Capital Taxation

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