Disability testing and retirement

Helmuth Cremer, Jean-Marie Lozachmeur and Pierre Pestieau

No 2006016, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labor force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labor 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.

Date: 2006-02
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Citations: View citations in EconPapers (3)

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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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