Optimal Social Security with Imperfect Tagging

Oliver Denk (1) , Jean-Baptiste Michau (2)

1 OCDE - Organisation de Coopération et de Développement Economiques = Organisation for Economic Co-operation and Development
2 X-DEP-ECO - Département d'Économie de l'École Polytechnique

Workers are exposed to the risk of permanent disability. We rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade-off between inducing the able to work and providing insurance against disability. After deriving the fi…rst-order conditions to this problem, we calibrate the model to the U.S. economy and run a numerical simulation. The government should offer back-loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene…ts. Also, the able who are (mistakenly) tagged as disabled should be encouraged to work until some early retirement age. This makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and, hence, improve insurance. Finally, we show how the …first-best allocation of resources can asymptotically be implemented by making strategic use of the disability test.

Mots clés: Disability insurance; Imperfect tagging; Optimal policy; Social Security

Domaines: Economies et finances

Oliver Denk, Jean-Baptiste Michau. Optimal Social Security with Imperfect Tagging. 2013. ⟨hal-00796521⟩