Disability: Economic Costs and Insurance Protection

Workforce withdrawal later in life due to a work-limiting disability may have different consequences for economic well-being in retirement than does retirement at the end of a relatively healthy work life. A chronic condition that had limited job opportunities and work performance for a large share of an individual's work life will lower earnings and savings, and increase probability of employment in a job not covered by a pension or health benefits. Thus individuals with lifelong disabilities are more likely to enter retirement with more limited resources compared to their nondisabled peers, and to be less financially protected against the unexpected risks in the retirement period. They are also more likely to leave the workforce earlier than their nondisabled peers. However, Haveman et al. (1999) show that individuals who first received Social Security disabled-workers benefits at age fifty-five or older have lower family income and assets than do their nondisabled peers, even as the latter entered the retirement. This difference is a consequence of their less favorable work histories and their consequent lower earnings-related retirement benefits, their lower likelihood of retirement employment, and the lower probability of being married (and having a second earner or pensioner).

Some disabled persons surely have such severe work limitations that they have few labor market "choices." However, for the majority of older workers with work-limiting conditions, the decision to continue paid labor force work will be determined in part by the financial advantage of continuing the work they are able to do, compared to receiving private or public benefits for which they are eligible. (For a fuller discussion on the labor market choice of men with disabilities, see Haveman et al. [1991], Haveman and Wolfe [1984], Bound [1989], and Leonard [1986].) These disability benefits may be linked to retirement benefits (e.g., from Social Security or employer-provided pensions). A work-related disability must be substantiated, however, and benefits may be received at an earlier age than allowed for receipt of retirement benefits. In making this choice, disabled workers assess the future trajectory of labor market opportunities and earnings, and compare this with the trajectory of income flows if they receive disability benefits. The lower market earnings because of a work-limiting disability and disability benefits that may be structured to reduce the penalty for "early" retirement (often coupled with coverage by employer-provided or public-sector health plans) are theorized to encourage work withdrawal. There is evidence that for some older disabled workers, disability benefits do encourage early retirement (Haveman et al. 1988; Berkowitz).