TAILIEUCHUNG - Designing Optimal Disability Insurance

Based on results of the 2008 Family Health Survey, the majority of Wisconsin residents in 2008 had health insurance for the entire past year. That is, they were continuously covered during the 12 months prior to the survey interview. An estimated 4,868,000 residents (89%) were insured for all of the past 12 months. An estimated 319,000 Wisconsin household residents (6%) had no health insurance of any kind during the past 12 months. Another 276,000 residents (5%) had health insurance for part of the year and were uninsured for part of the year. Together, an estimated. | Federal Reserve Bank of Minneapolis Research Department Designing Optimal Disability Insurance Mikhail Golosov and Aleh Tsyvinski Working Paper 628 January 2003 ABSTRACT In this paper we describe how to optimally design a disability insurance system. The key friction in the model is imperfectly observable disability. We solve a dynamic mechanism design problem and provide a theoretical and numerical characterization of the social optimum. We then propose a simple tax system that implements an optimal allocation as a competitive equilibrium. The tax system that we propose includes only taxes and transfers that are similar to those already present in the . tax code a savings tax and an asset-tested transfer program. Using a numerical simulation we compare our optimal disability system to the current disability system. Our results suggest a significant welfare gain from switching to an optimal system. Golosov Tsyvinski University of Minnesota and Federal Reserve Bank of Minneapolis. We thank Daron Acemoglu George-Marios Angeletos Marco Bassetto Hal Cole Larry Jones Patrick Kehoe Robert Lucas Jr. Lee Ohanian Chris Phelan Nancy Stokey and especially . Chari and Narayana Kocherlakota for their comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. 1. Introduction The Social Security Disability Insurance SSDI program is one of the largest social insurance programs in the United States. In 2001 the program provided income to more than 6 million individuals which accounted for 14 percent of Social Security beneficiaries. The program cost 61 billion1 constituted 15 percent of Social Security benefits and amounted to percent of gross domestic product GDP . The size of the program far surpassed spending on unemployment insurance food stamps or any other similar program SSA 2000 . Perhaps

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