Disability: Incentives Matter

We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies…We document that LTD claims rates are much lower than claims rates on the public analogue to LTD, the Social Security Disability Insurance program. We find that a higher replacement rate and a shorter waiting time to benefits receipt — also known as the Elimination Period or EP — significantly increase the likelihood that workers claim LTD. About sixty percent of the effect of a longer EP is due to censoring of shorter claims, while the remainder is due to deterrence: workers facing a longer EP are less likely to claim benefits for impairments that would lead to only a brief period of LTD receipt. This deterrence effect is equally large among high and low-income workers, suggesting that moral hazard rather than liquidity underlies the behavioral response. Consistent with this interpretation, the response of LTD claims to plan parameters is driven primarily by the behavior of the healthiest disabled, those who would return to work after receiving LTD.

Source: NBER working paper.

Comments (3)

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  1. Alex says:

    This is very interesting to read, thanks John.

  2. Otis says:

    Good read.

  3. Devon Herrick says:

    This is one of those studies that makes intuitive sense, but had to be proven empirically before public health advocates would believe the results. The result: people will game the system if allowed. Work takes time but pays better than doing nothing. Doing nothing (i.e. leisure) is great, but it pays nothing. In most cases, disability pays less than work, but requires no effort. Some people will accept a lower income in return for increased leisure. In economic terms, people who apply for disability despite not really being disabled are buying leisure at lower rates than merely quitting work.