The Dynamics of Disability: Evidence from a Cohort of Back Pain Patients

Ellen Meara, Jonathan Skinner

NBER Retirement Research Center Paper No. NB 11-09
Issued in September 2011

The Social Security Disability Insurance (SSDI) program has been growing rapidly in the past several decades and is projected to run out of money within the decade. In one view, the growth has been generated by the increased generosity of SSDI benefits coupled with sluggish labor markets for lower-educated individuals. In this paper, we develop an alternative model; individuals differ in the extent to which they depreciate their health capital, which in turn can yield higher current wages in some physically demanding jobs. In turn, workers in these jobs end up later in life with poor health and labor market opportunities, and are therefore relatively more likely to apply for SSDI. This model predicts both continued poor health of those applying for SSDI over time, and the critical importance of pain and functioning - rather than just market opportunities - in predicting SSDI applications. We use two data sets, the Health and Retirement Study, and the SPORT randomized clinical trial data on disk herniation (IDH). Among the SPORT patients, nearly everyone is suffering from acute pain at baseline. Over time, a much larger fraction of high school dropouts develop chronic and persistent back pain, which in turn leads to a higher fraction of SSDI applicants. We argue that in a model of endogenous pain and functioning, the design of disability insurance can have a real impact on the health of those workers most likely to apply.

PDF (456 K)