Welfare reform and the next generation
Disability insurance is a critical safety net in modern economies. In the United States over 10 million Americans received Social Security disability benefits in 2016. This reliance has made many wary of making changes to such a vital program.
But a 1993 reform in the Netherlands shows that cuts to disability benefits can actually have positive effects on the children of recipients, according to a paper in the American Economic Journal: Applied Economics.
By the 1980s, the Dutch welfare system’s spending was out of control, according to some observers. Reformers reined in costs by lowering disability benefits and tightening eligibility criteria for recipients less than age 45 as of August 1, 1993, while participants over age 45 were grandfathered in under the old rules.
The researchers analyzed the impact of the cuts on children using a technique called regression discontinuity design. They compared the outcomes for kids whose parents retained their benefits to those whose parents were just below the new age cutoff.
Figure 6 from the authors’ paper shows what happened to the children’s level of educational attainment.
Figure 6 from Dahl and Gielen (2021)
The x-axis in both panels indicates the age of a parent at the date of the reform, and the dashed vertical line separates the two parental cohorts. (The solid lines are lines of best fit, and the dotted lines are 90 percent confidence intervals).
At the cutoff, there is a sharp drop in both years of education (left panel) and the likelihood of completing secondary education (right panel). This is evidence that children whose parents retained their full benefits were less likely to complete as much schooling as children whose parents just missed the cutoff.
The researchers estimate that, on average, children of reform-exposed parents received an extra 0.12 years of education and were 2.2 percentage points more likely to complete secondary education than children of parents whose benefits were not lowered through the reforms.
The authors suggest that kids (or their parents) anticipate this lower reliance on disability insurance and so invest more in their education while they are young.
“Intergenerational Spillovers in Disability Insurance” appears in the April 2021 issue of the American Economic Journal: Applied Economics.