Video Edition: Disability Insurance

November 24, 2015

This four-minute video was released Nov. 24, 2015.

Transcript

Disability rolls have been rising dramatically for 20 years or so. Now, it covers about nine million people. And the question that one has to answer is, what would be the "optimal" size-- and "optimal" I put in quotes-- of a disability insurance program run by the public government?

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So my name is David Wiczer. I've been an economist here since July 2013. And my work is basically macroeconomics and labor economics and kind of the intersection of the two. The paper is called Occupational Hazards, and its work with Amanda Michaud, who's a professor at Indiana.

Across occupations, the risk of becoming disabled is quite different. So there's types of risks, like you could lose an arm, but then, there's also types of risks like it's just a physically demanding job, that you do it every day, and it involves a deterioration in your back. And so then, over time, that accumulates and means that you might have to apply for disability insurance.

And then, there are some occupations, such as my own, where I sit here with nice lumbar support in my chair and I'll probably be able to do it for quite a long time. So that means that there's actually two effects of disability insurance. So the first is this kind of classic what does insurance do, sort of affect. So people have some risk that they can't fully save against.

So you might have some physical limitation that prevents you from being able to work later in life. And so, in that sense, disability insurance is providing some income for these people, what welfare does. But then, there's this other effect of disability insurance that we think we're highlighting and is somewhat novel, which is that because it differentially affects some occupations than others, it actually ends up having some effect on what sort of occupations people want to take. So it's really important to be kind of, in a way, subsidizing these occupations.

An example is that there are some really risky occupations, like it's terribly difficult work to go out on a fishing boat for some types of fish. And so if it weren't for disability insurance, maybe nobody would do those jobs. However, I really like eating fish sandwiches.

And so this fish sandwich effect means that even people who are in relatively safe jobs don't necessarily object to having disability insurance. You're not going to benefit from the payments, but you are going to benefit from the fish sandwiches that are produced by people doing the risky jobs. Everybody's better off with some amount of disability insurance.

What does this imply for the U.S. Social Security disability program? So we computationally create an economy that resembles the U.S. in certain key factors. What's the risk mix of occupations in the U.S.? What's the income level, et cetera.

And what we're able to say is that in a world resembling the U.S., the optimal level of disability insurance is actually a more generous system than what we currently have. But what are the real societal benefits from going from the current system to the optimal system? And those actually turn out to be quite moderate.

Our analysis would suggest a slightly larger system, but that you really wouldn't notice the difference, in a sense. So we think that this is an important bit of work because it's kind of informing the debate right now that's happening in policy circles about what sort of disability insurance program should we have. And quantitatively, the current system, given these two features, is actually not so bad.

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The rolls of those receiving disability payments through Social Security have been on the rise for about 20 years and now number close to 9 million people. As policymakers debate the pros and cons of the program, economists are researching what would be the optimal disability insurance program run by the government.

In this video, economist David Wiczer talks about a study he and a colleague undertook. It shows that the ideal program would be not much more generous than what we already have. Their work also shows that everybody benefits from the program — even those who are not disabled — because the insurance encourages people to take on dangerous jobs from which we all benefit.

Read the working paper.

St. Louis Fed economists and experts talk about their research, topics in the news and issues related to the Fed. Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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