Social Security

The key aim of the paper is to understand the relationship between the Social Security benefits and the decline in assets associated with poor health. In a prior paper we calculated this "asset cost" of poor health, finding that the postretirement evolution of assets was much greater for persons in good health than for those in poor health and the "asset cost" was much greater than out-of-pocket medical expenditures would suggest. We now extend our earlier analysis to understand how Social Security benefits affects the spend-down of assets. One innovation of this analysis is a new health index that is based on detailed health information from all five cohorts that are part of the Health and Retirement Study. We use this index to explore in some detail the progression of health with age and emphasize in particular the persistence of individual health status. We also re-estimate the asset cost of poor health based on the new index and find that the estimates are quite consistent with our prior estimates. Finally, we estimate the relationship between annuity income (including Social Security benefits) and the evolution of assets based on estimates of the change in assets from one wave to the next. We find that, controlling for health status, a $10,000 increase in Social Security benefits would increase the change in assets from one wave to the next by between $4,120 and $10,690.

Despite the presence of Medicare, out-of-pocket medical spending is a large expenditure risk facing the elderly. While women live longer than men, elderly women incur higher out-of-pocket medical spending than men at each age. In this paper, we examine whether differences in marital status and living arrangements can explain this difference. We find that out-of-pocket medical spending is approximately 29 percent higher when an individual becomes widowed, a large portion of which is spending on nursing homes. Our results suggest a substantial role of living arrangements in out-of-pocket medical spending; however, our estimates combined with differences in rates of widowhood across gender suggest that marital status can explain only one third of the gender difference in total out-of-pocket medical spending, leaving a large portion unexplained. On the other hand, gender differences in widowhood more than explain the observed gender difference in out-of-pocket spending on nursing homes.

The Social Security Disability Insurance (SSDI) program has been growing rapidly in the past several decades and is projected to run out of money within the decade. In one view, the growth has been generated by the increased generosity of SSDI benefits coupled with sluggish labor markets for lower-educated individuals. In this paper, we develop an alternative model; individuals differ in the extent to which they depreciate their health capital, which in turn can yield higher current wages in some physically demanding jobs. In turn, workers in these jobs end up later in life with poor health and labor market opportunities, and are therefore relatively more likely to apply for SSDI. This model predicts both continued poor health of those applying for SSDI over time, and the critical importance of pain and functioning—rather than just market opportunities—in predicting SSDI applications. We use two data sets, the Health and Retirement Study, and the SPORT randomized clinical trial data on disk herniation (IDH). Among the SPORT patients, nearly everyone is suffering from acute pain at baseline. Over time, a much larger fraction of high school dropouts develop chronic and persistent back pain, which in turn leads to a higher fraction of SSDI applicants. We argue that in a model of endogenous pain and functioning, the design of disability insurance can have a real impact on the health of those workers most likely to apply.

Between the ages of 50 and 64, 7 percent of full-time workers will have a major adverse health event, such as a heart attack, a stroke, or a new onset of cancer. Evidence shows clearly that the labor force response to health shocks differs systematically across groups. Relative to the 12 percent of full-time workers overall who apply for or receive disability insurance (DI) within 4 years after a health shock, the share is 27 percent among those with less than a high school degree. For blacks, the application or receipt rate is 21 percent. We analyze these issues empirically using 1994–2008 data from the Health and Retirement Study (HRS). Our paper first presents a simple model of the response to an adverse health shock, emphasizing the importance of health capital and labor supply theories of disability application decisions. We then test the implications of these models regarding differences across demographic groups and the importance of health and labor supply variables as determinants of the DI application decisions. In a sample of older workers, after controlling for the onset of a new major health shock, demographic differences diminish only slightly, but they disappear after controlling further for labor market variables. Among the subset of workers who experience a health shock, we find further evidence that the nature of the health shock and prior health status matters a great deal for the DI application decision, as do labor market related variables. A rich model of health and labor supply factors explains 40 to 60 percent of the variation in DI application. However, health and labor supply variables in our models cannot explain large differences in DI application by education and race.

Disability is a permanent unexpected shock to labor supply which according to the theory of the added worker effect should induce a large spousal labor supply response. The Disability Insurance (DI) program is designed to mitigate the income lost due to disability. To the extent that it does this, it can crowd out the spousal labor supply response predicted by the added worker effect theory. Using a unique data that matches administrative data combining worker's earnings histories and disability insurance applications, this study finds that DI crowds out spousal labor force participation by 6 percent and the displacement spans multiple years. The estimated crowd-out effects are also larger for younger wife cohorts and cohorts with particular types of impairments such as musculoskeletal disease.

We investigate how the shift in the private pension coverage from defined benefit (DB) to defined contribution (DC) retirement plans since the 1980s contributed to the substantial rise in labor force participation of older Americans. We develop a life cycle model of retirement that captures important aspects of private (DB and DC) and public (Social Security Old-Age) pensions. We demonstrate how this novel framework can assist policy makers and researchers in analyzing the complex interrelations of labor supply decisions, retirement behavior, and wealth accumulation. We begin by illustrating important differences in the incentives for labor supply and retirement behavior provided by DB and DC pensions. We show that the timing of the exit from the labor force is closely tied to wealth accrual in DB plans, while wealth accrual in DC plans does not provide similar incentives for the timing of retirement. We then use the model to conduct a cohort-based simulation analysis of labor force participation for the period 1977 to 2010. The results illustrate the potential significance of the rise in employer-sponsored DC pensions in explaining the increase in labor force participation of older Americans. We estimate that, holding the share of individuals with employer-sponsored pensions constant, the shift from DB to DC pension coverage increased the labor force participation rate of workers age 60 to 64 by 4.9 percentage points (1.7 points for ages 65–69). Finally, we show that DC pension holders are more concentrated at the earliest take-up age for Social Security old-age retirement benefits and are less responsive to changes in Social Security retirement age policy than DB pension holders.

Policy initiatives such as increases in the full retirement age implicitly reduce benefits for early retirement. Yet research suggests that those in physically demanding jobs may be particularly adversely affected by such policies. We examine to what extent physical job demand relates to early retirement decisions in a population of aging manufacturing workers. We follow a cohort of approximately 1,500 stably employed male Alcoa employees aged 51–58 in 2001 followed forward to 2008. We use a variety of models to examine whether externally rated physical job demand at middle age is related to early retirement. We also examine whether pension eligibility and payouts induce earlier retirement, especially for those with more physically demanding jobs, while accounting for wage differentials, injury history, and underlying health. Our results suggest that workers whose jobs have high physical demand retire earlier after accounting for the wage differential and health. We also find that the minority of workers who transition to lower demand jobs, due to previous injury or health issues, are less likely to retire early. Finally, while we find evidence that pension eligibility and wealth accumulation induce earlier retirement, there was limited evidence of a difference by job demand.