Indiana University SPEA Edward J. Bloustein School of Planning and Public Policy University of Pennsylvania AIR American University

Panel Paper: Does Welfare Inhibit Success? the Long-Term Effects of Removing Low-Income Youth from Disability Insurance

Friday, November 13, 2015 : 8:50 AM
Zamora (Hyatt Regency Miami)

*Names in bold indicate Presenter

Manasi Deshpande, University of Chicago; NBER
I study two long-standing questions in the debate over welfare programs: whether welfare inhibits labor market success and how much insurance welfare provides to recipients. I estimate the long-term effects of removing low-income youth with disabilities from Supplemental Security Income (SSI) on the level and variance of their earnings and income in adulthood. Using administrative data from the Social Security Administration, I implement a regression discontinuity design based on a change in the probability of SSI removal at age 18 created by the welfare reform law of 1996. I find that SSI youth who are removed earn on average $4,000 per year, an increase of just $2,600 relative to those who remain on SSI. This increase in earnings covers only one-third of the $7,700 they lose in annual SSI income, and they lose an additional 10% each year in other transfer income. As a result, removed SSI youth experience a present discounted income loss of $73,000, or 80% of the original SSI income loss, over the 16 years following removal. In addition to the large drop in income levels, the within-person variance of income quadruples as a result of the SSI loss. Based on back-of-the-envelope calculations assuming risk aversion and limited intertemporal consumption smoothing, I find that up to one-quarter of the recipient's welfare loss from SSI removal is attributable to the increase in income volatility rather than to the fall in income levels. This result suggests that ignoring the income stabilization effects of welfare and disability programs could substantially underestimate their value to recipients.

Full Paper: