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Social Security Disability Insurance (SSDI) beneficiaries receive a cash benefit and become eligible for health insurance from Medicare two years after their enrollment. Disabled workers who leave the labor force typically lose health insurance from their employers, and they face significant medical expenditure risk as a result of their disability. Therefore, access to Medicare makes SSDI an especially attractive alternative to remaining employed for workers with disabilities. My research is the first to analyze the importance of medical expenditure risk and Medicare in analysis of SSDI, and it addresses the following questions: (1) How does access to Medicare via SSDI enrollment affect the incentive to leave employment and to apply for SSDI? (2) What are the welfare effects of access to Medicare via SSDI? (3) How will SSDI policy reforms that change access to Medicare affect labor supply, welfare, and the financial stability of SSDI? To answer these questions, I specify a life-cycle model of labor supply, consumption, and SSDI application decisions. The model incorporates a stochastic process for out-of-pocket medical expenditure as well as the institutional features of Medicare. I estimate the model using data from the Panel Study of Income Dynamics, using the method of Indirect Inference. Counterfactual simulations indicate that availability of Medicare coverage via SSDI enrollment reduces the employment rate of men at ages 23 to 62 by 0.7 percentage points (from 87.7% to 87.0%). Medicare coverage via SSDI improves social welfare even after accounting for the higher taxes required to finance the additional enrollees who are induced to apply. Finally, I find that increasing the Medicare waiting period for SSDI enrollees is a relatively efficient way to reduce the SSDI budget deficit without sacrificing much of social welfare, compared to other alternatives such as making SSDI screening criteria more stringent.


Social Security, Disability Insurance, Medicare, Medical Expenditure


Labor Economics | Portfolio and Security Analysis

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Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.