Three Essays on the U.S. Social Security Disability System

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Na Yin, State University of New York at Stony Brook

Chapter One:  The Disability Insurance (DI) program uses “full disability” definition in the determination process. That is, applicants have to be considered unable to work at all to be eligible for the disability benefits. The inherent work disincentive in this dichotomous disability definition has been widely recognized among the policy makers and researchers. Disability status should ideally be a continuous measure with different levels instead of a binary index. In fact, we observe that a substantial proportion of DI applicants are partially disabled or even not disabled. Moreover, many of them have been accepted to the program. Therefore, in order to foster work among the disabled and help the solvency of the Social Security system, it is crucial to understand the residual work capacities among the workers with different levels of disability. This study will compare the residual work capacity among the fully disabled, the partially disabled, and the non-disabled, to understand the disabled individuals’ labor force participation decisions and DI application decisions, providing preliminary evidence for Chapter Two.

Chapter Two:  This project will analyze the consequences for the solvency of the Old Age Retirement system of reforming the Social Security Disability Insurance (DI) program to foster work among the disabled, by giving incentives to those who still have residual work capacity to exert productive work in the labor market, while keeping the overall costs of the program at a level no higher than the current one. I propose the introduction of partial benefits, allowing individuals to combine relatively high levels of earnings with lower disability benefits. The appeal of this policy hinges on the possibility of inducing applicants to self-select themselves into a given disability level, while maintaining those with some work capacity in the labor force, and therefore keep them contributing through their labor taxes to the Social Security system, easing the budgetary pressures of the overall Social Security system. More than 20% of potential SSDI applicants could be affected by this reform, resulting in a substantial flow of additional contributions to the system by these workers. Within a dynamic model of individuals’ labor supply, retirement, and disability application decisions, I study the conditions under which the new system can be less expensive, foster more work, and have lower classification error rates, than the current one, even after taking into account the induced entry effect that such a reform is likely to have.

Chapter Three:  It is puzzling that very few individuals aged between the Early Eligibility Age (EEA) and the Normal Retirement Age (NRA), even if eligible, are observed to apply for DI, although individuals claiming retirement benefits before the NRA are increasing substantially in past 40 years. This study will model this policy puzzle, which solves and simulates a realistic and empirically based dynamic structural model that characterizes the complexity of individuals’ incentives to apply for DI and OA programs, and endogenizes work decisions both before and after claiming early retirement.

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