Disability Insurance: Theoretical Trade-Offs and Empirical Evidence*

Disability insurance provides protection against health shocks that limit the ability to work. In most countries, these programmes are large and growing, both in expenditure and in number of recipients. We discuss the traditional trade-off between insurance and incentives in providing this insurance, with a focus on the US and UK experiences. There is substantial evidence on the extent of the labour supply incentive costs of disability insurance, but there has been a lack of evidence on the insurance value until very recently. Further, evidence on errors in the disability insurance process suggests false rejections of genuine claimants is a substantial problem, and these are more serious than false acceptances of healthy applicants. We provide a life-cycle framework for understanding the trade-offs and to evaluate the welfare implications of policy reforms. We argue that reforms should be focused on reducing false rejections and supporting labour market attachment. The difficulty in considering reform is that the design of disability insurance has many aspects that interact and impact on outcomes.     

Altruism, incomplete markets, and tax reform

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.     

Optimal smooth consumption and annuity design

We propose an optimization criterion that yields extraordinary consumption smoothing compared to the well known results of the life-cycle model. Under this criterion we solve the related consumption and investment optimization problem faced by individuals with preferences for intertemporal stability in consumption. We find that the consumption and investment patterns demanded under the optimization criterion is in general offered as annuity benefits from products in the class of ‘Formula Based Smoothed Investment-Linked Annuities’.     

Taxes, benefits, and careers: Complete versus incomplete markets

An incomplete-market life-cycle model with indivisible labor makes career lengths and human capital accumulation respond to labor tax rates and government supplied non-employment benefits. We compare aggregate and individual outcomes in this individualistic incomplete-market model with those in a comparable collectivist representative-family model with employment lotteries and complete-insurance markets. The incomplete- and complete-market structures assign leisure to different types of individuals who are distinguished by their human capital and age. These microeconomic differences distinguish the two models in terms of how macroeconomic aggregates respond to some types of government supplied non-employment benefits, but remarkably, not to labor tax changes.     

Transfers in Spanish State Retirement Pensions

A central issue in the recent reforms of state pensions in Spain has been to increase the proportionality between contributions and benefits along actuarially fair lines. The aim of this paper is to quantify the transfer component of social security retirement pensions, with transfer being understood as the difference between the pension effectively received and that which would be received under a system of actuarial fairness. The analysis is placed within a life-cycle framework, with particular reference to the distributive effects by income level. The results show that, in the past, there was a marked bias in favour of the objective of intergenerational and intragenerational redistribution, to the detriment of the objective of income insurance. This paper examines the factors that determine the final value of the transfer component within the entire Spanish pensions system.     

Pension Wealth Uncertainty

Using a representative sample of Italian investors, we measure the uncertainty of social security benefits by eliciting for each individual the subjective distribution of the replacement rate as a summary indicator of pension uncertainty. We find that pension uncertainty varies across individuals in a way that is consistent with what one would expect a priori, given different information sets and pension schemes. In particular, individuals who are a long way from retirement, and thus face more career uncertainty, report more subjective pension uncertainty. Since expectations reveal information about people's understanding of pension reforms, our findings suggest that they should also be an important determinant of how people respond to reforms.     

Social welfare effects of tax-benefit reform under endogenous participation and unemployment: an ordinal approach

This paper analyzes the social welfare effects of tax-benefit reforms in a framework integrating endogenous labor supply and unemployment. We adopt an ordinal approach to social welfare comparisons by searching for “socially desirable” reforms that would improve social welfare for an entire class of social welfare functions. In the model, there is a discrete distribution of individuals’ productivities and individuals are heterogeneous with respect to leisure preferences (or disability of work). Labor supply decisions are limited to the participation decision. Unemployment is modeled in a search and matching framework with individual wage bargaining. For the social welfare analysis, the model is calibrated for Switzerland. Starting from a situation with an unemployment benefit scheme, the introduction of in-work benefits is shown to be a “socially desirable” reform: it would be unanimously preferred to the current situation according to all social welfare functions based on the criteria of Pareto, anonymity, and the principle of transfers. This result holds for two different types of preference heterogeneity (leisure preferences or disability of work) and also for the case where job search effort cannot be monitored.     

Deposit insurance system,risk-adjusted premium and bank systemic risk: Evidence from China

In this paper, we investigate whether and how the Deposit Insurance (DI) system and its Risk-adjusted Premium (RAP) scheme affect the systemic risk of Chinese banks. Based on bank-level panel data from 2007 to 2020 and the difference-in-differences (DID) method, we find that the establishment of the explicit DI system in China increases bank systemic risk, while the implementation of RAP alleviates this negative impact by reducing systemic risk. We further find the mechanism behind this phenomenon that bank profit acts as a mediator. We also find evidence for international heterogeneity using cross-country data and show that, as China has a longstanding implicit government guarantee, the establishment of explicit DI actually reduces the extent to which banks are protected, thus increasing bank systemic risk. Our study highlights the specificity of Chinese DI system, offers important policy implications for the design of financial safety nets in China and worldwide.     

Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies

This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms – such as reductions in employment protection – increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath – either because of the zero bound on policy rates or because of the membership in a monetary union – may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.     

Public Pension Reform in the United Kingdom: What Effect on the Financial Well‐Being of Current and Future Pensioners?*

Unlike many tax and benefit changes, reforms to public pension programmes take many years to have their full effect. This paper examines the effect of reforms to the public pension programme in the United Kingdom on the state retirement incomes of current generations of pensioners and on the prospective state incomes of future generations of pensioners. We show that, for an individual with lifetime earnings close to male average earnings, the UK pension system is at its most generous to those reaching the state pension age around the year 2000, but that the introduction of the state second pension and the pension credit postpones this peak for individuals on lower incomes and for those with substantial periods out of paid employment spent with caring responsibilities. We also consider how the ‘mix’ of benefits, particularly between the contributory and income‐tested sectors, could change over time, and the impact that this would have on incentives to save for retirement.     

Reforming Social Insurance in The Netherlands

This paper discusses recent reforms of social insurance in the Netherlands. It describes how a serious economic crisis in the beginning of the 1980s set the stage for the subsequent reform process. The most fundamental reforms were introduced in the areas of sickness insurance, which was privatized, and disability insurance, which now involves experience rating. After exploring various challenges affecting the future of social protection, the paper discusses various remaining policy options.     

The effects of hospital ownership on medical productivity

To develop new evidence on how hospital ownership and other aspects of hospital market composition affect health care productivity, we analyze longitudinal data on the medical expenditures and health outcomes of the vast majority of nonrural elderly Medicare beneficiaries hospitalized for new heart attacks over the period 1985-1996. We find that the effects of ownership status are quantitatively important. Areas with a presence of for-profit hospitals have approximately 2.4% lower levels of hospital expenditures, but virtually the same patient health outcomes. We conclude that for-profit hospitals have important spillover benefits for medical productivity.     

Apply with Caution: Introducing UK‐Style In‐Work Support in Germany*

Estimates of the labour supply effects of recent UK reforms in the area of direct taxes and benefits show that policy can have significant influence on the level of employment. We confirm this in a simulation of an in‐work support system introduced into the German tax and benefit system. Our simulation results suggest that introducing in‐work tax credits in Germany would increase the employment of single individuals by over 105,000 but would result in a reduction of labour supply among individuals living in couples by about 70,000, among both women and men. The result found for men is especially important as it is markedly different from all results for the UK, where the net response among men has always been found to be positive. Our estimation results call for a high degree of caution as far as ‘importing’ UK‐style tax credits to Germany is concerned. In‐work support based on family income would reinforce the existing work disincentives for secondary earners, reducing the employment levels of both men and women living in couples.     

Longevity risk, retirement savings, and financial innovation

Over the last couple of decades unprecedented increases in life expectancy have raised important concerns for retirement savings. We solve a life-cycle model with longevity risk, which can be hedged through endogenous saving and retirement decisions. We investigate the benefits of financial assets designed to hedge the shocks to survival probabilities. When longevity risk is calibrated to match forward-looking projections, those benefits are substantial. This lends support to the idea that such hedging should be pursued by defined benefit pension plans on behalf of their beneficiaries. Finally, we draw implications for optimal security design.     

The effect of retaliation costs on employee whistleblowing

We use large increases in unemployment insurance (UI) benefits to study the effects of expected retaliation costs on employee whistleblowing. Increases in UI benefits reduce the costs that arise from a job loss, one of the costliest forms of retaliation. We find that increases in UI benefits increase the number of facility-level employee workplace safety complaints filed with the regulator. Furthermore, UI benefit increases also result in more violations and more penalties. The effects are concentrated in firms where retaliation is more likely as measured by weaker employee relations, internal controls, and monitoring. Our findings show the importance of reducing retaliation costs to tap into employees’ knowledge of misconduct.     

Medicare in the 21st century.

The authors provide an overview of the Medicare program in terms of how the current program operates, the current issues it faces that may shape possible options for reform, and the implications of these features and issues for employment-based health plans. Current issues include adoption of a premium support model, changes in the eligibility age for Medicare benefits, Medigap insurance, benefits covered and customer service.     

美国联邦儿童医疗保险制度审计:分析与借鉴

本文介绍了美国审计署(Government Accountability Ofice,GAO)和美国卫生部对联邦儿童医疗保险制度执行效果的审计监督情况。并以此为切入点,分析了美国公共政策审计的三个鲜明特点:以立法模式保障审计程序的规范、定量为主体现审计方法的科学性、以需求为导向引致的审计形式多样化。借鉴美国公共政策审计实践的经验,作者提出了我国开展公共政策审计的一系列建议,包括将公共政策审计纳入国家审计发展规划,推动公共政策审计的制度化;完善法律保障,建立监督架构,加强理论引导,推动公共政策审计的规范化;以风险控制为导向,完善审计方法,把握审计时机,加强政策跟踪,坚持谨慎原则,推动公共政策审计的科学化。     

Structural reforms in a debt overhang

The effects of reforms in product and labor markets are assessed in an economy where credit restrictions and long-term debt combine to produce a persistent recession with slow deleveraging following a negative financial shock. We show that product market reforms stimulate output and employment even in the short run, despite their deflationary effects. By favoring a faster recovery of investment and collateral values, such reforms bring forward the end of the deleveraging phase. This channel is missing in the case of labor market reforms, which have more modest effects on economic activity.