Disability and Distress: The Effect of Disability Programs on Financial Outcomes

Manasi Deshpande, Tal Gross, Yalun Su

NBER Working Paper No. 25642
Issued in March 2019
NBER Program(s):Economics of Aging, Labor Studies, Public Economics

We provide the first evidence on the relationship between disability programs and markers of financial distress: bankruptcy, foreclosure, eviction, and home sale. Rates of these adverse financial events peak around the time of disability application and subsequently fall for both allowed and denied applicants. To estimate the causal effect of disability programs on these outcomes, we use variation induced by an age-based eligibility rule and find that disability allowance substantially reduces the likelihood of adverse financial events. Within three years of the decision, the likelihood of bankruptcy falls by 0.81 percentage point (30 percent), and the likelihood of foreclosure and home sale among homeowners falls by 1.7 percentage points (30 percent) and 2.5 percentage points (20 percent), respectively. We find suggestive evidence of reductions in eviction rates. Conversely, the likelihood of home purchases increases by 0.86 percentage point (20 percent) within three years. We present evidence that these changes reflect true reductions in financial distress. In our model of optimal disability benefits, considering these extreme events increases optimal disability benefits and potentially shortens waiting times.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25642