Disability insurance and the effects of return-to-work policies

Abstract

I provide a quantitative assessment of the labor market and welfare effects of return-to-work policies targeted at disability insurance (DI) recipients. I do so by estimating a life-cycle model in which individuals with different health evolving over time choose consumption, labor supply, and DI application. I find that a wage subsidy incentivizing return to work is welfare improving, and the willingness to pay for such reform is increasing in sickness and decreasing in wealth . This policy increases labor force participation of DI beneficiaries by 4.6 percentage points, and decreases the DI rate by 5.7 percentage points. A policy mandating a 10% yearly eligibility reassessment would decrease the welfare of individuals in bad health and poor economic condition , and force about 30% of the beneficiaries to exit the program, 54% of whom would return to work.

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