How Financial Incentives Induce Disability Insurance Recipients to Return to Work

Magne Mogstad, Andreas Kostol

NBER Disability Research Center Paper No. NB 13-06
Issued in September 2013

One concern with Disability Insurance (DI) programs is their apparent work disincentives. To address this concern, some countries have recently modified their programs in ways that allow DI recipients to keep some of their benefits if they return to work. In this study, we analyze the effectiveness of these reforms, based on a sharp discontinuity in DI policy in Norway. In January 2005, the Norwegian government introduced a program that reduced DI benefits by approxi-mately $0.6 for every $1 in earnings that they accumulated above the SGA threshold. However, only recipients who had been awarded DI before 2004 were eligible for the return-to-work pro-gram. This sharp discontinuity in DI policy allows us to compare the behavior of recipients awarded DI just before 2004 (i.e., the treatment group) and those award DI after that date (i.e., the control group). We find that many DI recipients have considerable capacity to work, and that they can be effectively induced to work by financial incentives. We further show that work in-centives can both increase the disposable income of DI recipients and reduce program costs.

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