Matthew S. Rutledge Research Economist Center for Retirement Research at Boston College

1. Holding Out or Opting Out? Deciding Between Retirement and Disability Applications in Recessions Matthew S. Rutledge Research Economist Center for Retirement Research at Boston College 14th Annual Retirement Research Consortium Conference Washington, DC August 3, 2012

2. The research was supported by a grant from the U.S. Social Security Administration (SSA) as part of the Retirement Research Consortium (RRC). The research in this paper was conducted while the author was a Special Sworn Status researcher of the U.S. Census Bureau at the Boston Census Research Data Center. All results have been reviewed to ensure that no confidential information is disclosed. The findings and conclusions expressed are solely those of the author and do not represent the views of SSA, the U.S. Census Bureau, any agency of the federal government, or Boston College. 1

3. Introduction • Older workers with health conditions face a choice: • Keep working until Social Security retirement benefits • Stop working and apply for disability benefits • Different incentives after 62nd birthday • Macroeconomic context matters 2

4. Research questions • How do Social Security retirement benefits influence disability insurance application? • How do labor market conditions affect the disability application decision for individuals: • Age 55 to 61, • Age 62+ not receiving retirement benefits yet, and • Age 62+ receiving retirement benefits? 3

5. Institutional background • Old Age and Survivors Insurance (OASI) • Retirement benefits as early as 62 • Larger benefit as Full Retirement Age (FRA) approaches • Social Security Disability Insurance (SSDI) • Benefits for long-term work impairment • Same benefit calculation as OASI, no actuarial adjustment • Automatically transferred to OASI at FRA • Medicare after 2 years • Supplemental Security Income (SSI) • Means-tested disability benefits 4

6. Previous literature • When unemployment rate increases… • Disability applications increase • Autor and Duggan 2006, Strand 2002, Coe et al. 2011 • Retirements increase • Coile and Levine 2007, Von Wachter 2007, Friedberg et al. 2008, Munnell et al. 2009 • OASI claiming increases • Coile and Levine 2011, Rutledge and Coe 2012 5

7. Contribution • Few studies model retirement and disability together • Chirikos and Nestel 1991, Bound, Stinebrickner, and Waidmann 2009, Benitez-Silva and Yin 2011 • Little focus on macroeconomic context • Dahl, Nilsen, and Vaage 2000 – Norway • This study: • Joint retirement and disability application decisions • Incentive change from OASI eligibility and receipt • Influence of time until 62nd birthday 6

8. Conceptual framework • SSDI-insured worker compares utility from retirement and disability • Then, unemployment rate increases • Before age 62: • Job loss => SSDI • Otherwise, cling to job and avoid long queue for SSDI • Hold out for OASI benefits if possible 7

9. Conceptual framework • OASI beneficiaries: • Already out of labor force, so low cost to SSDI • Restore full benefit without actuarial adjustment • When U rate rises: ambiguous effect • Eligible for OASI but not yet claimed: • Revealed preference/ability for work • When U rate rises: cling to job, fall back on OASI first 8

10. Data • SIPP Gold Standard File (1989-2010) • SIPP: demographics, labor market outcomes, state • SSA 831 File: disability applications • SSA MBR File: benefit receipt • SSA/IRS earnings records • Sample: 33,545 income-eligible adults age 55-FRA 9

11. Disability applications by age Source: Author’s calculations from the SIPP Gold Standard File. 10

12. SSDI applications by age over time Source: Author’s calculations from the SIPP Gold Standard File. 11

13. SSDI applications and the macroeconomy Correlations between the SSDI Application Rate and the National Unemployment Rate, by Age Source: Author’s calculations from the SIPP Gold Standard File. 12

14. Disability, OASI, and the macroeconomy Just claimed Source: Author’s calculations from the SIPP Gold Standard File. 13

15. Empirical Strategy • Discrete-time hazard model of disability application • Months between 55/entry and FRA • “Failure”: Application to SSDI/SSI • Coefficients of interest • Unemployment rate • OASI receipt • Eligible but not yet receiving OASI • …and their interactions 14

16. Disability application and state U rate Hazard Model Marginal Effects for Any SSDI or SSI Application Source: Author’s calculations from the SIPP Gold Standard File. 15

17. SSDI application and state U rate Hazard Model Marginal Effects for SSDI Application Source: Author’s calculations from the SIPP Gold Standard File. 16

18. Disability and U rate: Summary • Compared to OASI-ineligible: • OASI beneficiaries more likely to apply to disability • Eligible non-beneficiaries less likely to apply • When unemployment rate increases: • OASI beneficiaries even more likely to apply to disability • Eligible non-beneficiaries even less likely to apply • No change in OASI-ineligible 17

19. Disability and U rate before age 62 • Estimate new hazard model of SSDI application • Months between 55/entry and 62ndbirthday • Key coefficient: function of months until 62 • No evidence of relationship between months until 62 and disability application • Also interactions with U rate are not significant • Exception: more likely to apply just before 62 18

20. Implications • Relationship between disability application and macroeconomy depends on OASI eligibility and receipt • Application costs are key factor • Labor force exit, especially • Near-retirement workers exception to cyclical application pattern 19