Association for Public Policy Analysis & Management

We study how U.S. Social Security Disability Insurance (DI) payments affect beneficiaries’ earnings. The formula linking DI payments to past earnings has “bend points,” or discontinuous changes in the marginal replacement rate, that allow us to use a regression kink design. Using Social Security Administration microdata on all new DI beneficiaries from 2001 to 2007, we document a robust income effect of DI payment amounts on earnings around a bend point. Our preferred estimates suggest that an increase in DI payments of one dollar causes an average decrease in beneficiaries’ earnings of twenty cents. In several contexts we find no evidence that the substitution effect of DI is large. This combination of findings suggests that the income effect is crucial in driving DI-induced reductions in earnings.