The Welfare Effects of Social Insurance
Sunday, Jan. 3, 2021 12:15 PM - 2:15 PM (EST)
- Chair: Erzo F.P. Luttmer, Dartmouth College and NBER
Beyond Health: Non-Health Risk and the Value of Disability Insurance
AbstractThe public debate over disability insurance (DI) has centered on concerns about individuals with less-severe health conditions receiving benefits. We go beyond health risk alone to quantify DI's overall insurance value, including value from insuring non-health risk. We find that DI recipients, especially those with less-severe health conditions, are much more likely to have experienced a wide variety of non-health shocks than non-recipients. Selection into DI on the basis of non-health shocks is so strong among individuals with less-severe health conditions that by many measures less-severe DI recipients are worse off than severe DI recipients. As a result, under baseline assumptions, DI benefits to less-severe recipients have an annual value (insurance benefit less efficiency cost) of $7,700 per recipient, about three-fourths that of DI benefits to severe recipients ($9,900). Insurance against non-health risk accounts for about one-half of DI's value.
The Insurance Value of Financial Aid
AbstractFinancial aid programs enable students from families with fewer financial resources to pay less to attend college than other students from families with greater financial resources. When income is uncertain, a means-tested financial aid formula that requires more of an Expected Family Contribution (EFC) when income and assets are high and less of an EFC when income and assets are low provides insurance against that uncertainty. Using a stochastic, life-cycle model of consumption and labor supply, we show that the insurance value of financial aid is substantial. Across a range of parameterizations, we calculate that financial aid would have to increase by enough to reduce the net cost of attendance by 30 to 80 percent to compensate families for the loss of the income- and asset-contingent elements of the current formula. This compensating variation is net of the negative welfare consequences of the disincentives to work and save inherent in the means-testing of financial aid. Replacing just the "financial aid tax" on assets with a lump sum would also reduce welfare.
The Insurance Value of Redistributive Taxes and Transfers
AbstractProgressive tax and transfer schedules serve a redistributive role by transferring from high-income to low-income individuals, but they also serve an insurance role by transferring from the high-income years to the low-income years within each person’s lifespan. This paper examines how the design of the tax and transfer system provides insurance against income risks by studying the two largest economic shocks faced by working-age households: layoffs and illness. Using 1.6 million layoffs and 1.2 million hospital stays linked to Canadian tax records, I first show that both events cause persistent declines in earnings lasting more than six years. The full tax and transfer system provides substantial insurance against these risks, shrinking the percentage of income lost post-layoff by 40% and post-hospitalization by 60%, which I estimate to be worth 7-10% of total post-event consumption. But less than half of this social insurance comes from the unemployment and disability insurance programs that formally insure these risks. The progressive shape of taxes and transfers provides the majority of social insurance, and is especially important for reducing the risk of catastrophic income losses and mitigating inequality in the income risks of layoffs and hospitalizations. Using a dynamic model, I find that the insurance value of redistributive taxes and transfers is considerable across the entire income distribution, and is more than twice as large at the bottom of the income distribution than at the top.
Northwestern University and NBER
Purdue University and NBER
George Washington University and NBER
University of California-San Diego and NBER
- H3 - Fiscal Policies and Behavior of Economic Agents
- I3 - Welfare, Well-Being, and Poverty