Disability Testing and Retirement

Pierre Pestieau, Helmuth Cremer and Jean-Marie Lozachmeur

No 5546, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labour force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labour and cannot be distinguished. However, they are not counted in the same way in social welfare. Benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions which may be induced in the individuals? retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.

Keywords: Disability; Retirement; Social security (search for similar items in EconPapers)
JEL-codes: H55 I12 J26 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-hea and nep-pbe
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Related works:
Journal Article: Disability Testing and Retirement (2007)
Working Paper: Disability testing and retirement (2007)
Working Paper: Disability testing and retirement (2006)
Working Paper: Disability Testing and Retirement (2004)
Working Paper: Disability Testing and Retirement (2004)
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