Partial Benefits in the Social Security Disability Insurance Program: A Policy Alternative to Foster Work among People with Disability

The current U.S. Social Security Disability Insurance program is an all-or-nothing system that has been
criticized for creating strong work disincentives. In an empirically grounded and calibrated life-cycle
model, I simulate behavioral responses to a partial disability benefit system, a policy alternative to the
current program, which allows individuals to claim partial disability and combine earnings with
disability benefits. The appeal of this policy hinges on the possibility of inducing applicants to selfselect themselves into a given disability level, while maintaining those with some work capacity in the
labor force, and therefore keep them contributing through their labor taxes to the Social Security
system, easing the budgetary pressures of the overall Social Security system. The current dichotomous
definition of disability can result in relatively productive individuals dropping from the labor force to
receive benefits in order to have access to a total income high enough to make ends meet. Instead, the
new system will establish a culture of continuous attachment to the labor force in the wake of health
limitations. The simulation results show that there will be significant increases in both DI applications
and DI rolls under the partial DI system; however, most of the increases are due to increases in
applications for partial benefits and awards to partial benefits. In fact, full DI benefits applications and
full DI benefit rolls will drop substantially. The mean duration spent on DI program will decrease
dramatically. Our budgetary and welfare calculations show that a partial DI system, under some
conditions, could result in financial savings for the program as well as individuals' welfare
improvements.