Designing Disability Insurance Reforms: Tightening Eligibility Rules or Reducing Benefits?

This paper develops a sufficient statistics framework for the welfare analysis of disability insurance (DI) policy reforms and applies it to two reform episodes in Austria. The framework derives social optimality conditions for the two main DI policy instruments — eligibility rules and benefit levels — expressed in terms of estimable reduced-form objects (fiscal multipliers and insurance losses). The fiscal multiplier of a DI policy instrument is defined as the ratio of total fiscal cost savings to the mechanical (counterfactual-behavior-held-fixed) fiscal cost savings; it measures how much the program shrinks per dollar mechanically removed, and values above 1 indicate behavioral crowd-out of DI enrollment. The paper then evaluates two Austrian reforms: (1) a 2013 increase in the Rehabilitation Stricter Assessment (RSA) age threshold from 57 to 58 (and separately to 59), which tightened eligibility for DI applicants aged 57 by requiring them to demonstrate inability to be retrained for alternative work; and (2) a 2003 reform that reduced DI benefit generosity for workers aged 30–60 as a side effect of a pension reform. Using difference-in-differences with cohorts just above and below the relevant thresholds, the paper finds that the RSA reform generated a fiscal multiplier of 2.50 (RSA to 58) and 2.05 (RSA to 59), while the benefit reduction generated a multiplier of only 1.41 (ages 57–60) and 1.36 (ages 30–56). The large gap implies that for a given mechanical cost saving, tighter eligibility rules generate 1.8 times more total fiscal savings than benefit cuts. The paper further provides empirical evidence that the insurance losses associated with stricter eligibility rules are, in all likelihood, smaller than those from benefit reductions, strengthening the dominance of eligibility tightening over benefit cuts as a DI reform instrument.

Josef Zweimüller | Macro Paper Warehouse

Designing Disability Insurance Reforms: Tightening Eligibility Rules or Reducing Benefits?