Occupations, Retirement, and the Value of Disability Insurance

Occupations vary greatly in physical intensity, and there are, correspondingly,
many differences in later-life work disability risk, retirement patterns, and applications for
Social Security Disability Insurance (SSDI)—a national program that insures shocks to work
productivity due to disability, with about 10 million current beneficiaries in the U.S. In light of
its widespread coverage and large differences in utilization across occupations, this paper aims
to measure the value of the SSDI program across a broad population and the extent to which
it influences the major choice of occupation. Using data from the Health and Retirement
Study and O*NET, I estimate a life-cycle equilibrium model of occupational choice, work,
savings, and disability at older ages, and find that incorporating occupations and preference
heterogeneity is an integral part of understanding work and SSDI application behavior. While
SSDI coverage is nearly universal and the premiums from workers are uniform, estimates suggest
that the value of the program varies greatly, from being worth 2.1 to 14.5 percent of earned
income—depending on preferences and choice of occupation—though for all groups it is welfare
improving. I also find that SSDI plays an important role in the choice of occupation for older
workers, providing an insurance value that results in over ten percent more people choosing
physically intense, blue-collar occupations at older ages. This overall effect, however, masks
the underlying selection of less risk-averse individuals into blue-collar jobs, which proves to be
necessary for accurately evaluating the impacts of policy on behavior.