Transcript Disability insurance: the pitfalls and how to navigate

Disability insurance: what are the
issues, what are countries doing and
how can they do better?
By
Estelle James
World Bank Pension Mini-Course, 2011
The economic rationale for mandatory
disability insurance
• Most people reach old age—when young we can plan
and save for the loss in earnings when old.
• A smaller number lose earning capacity when young due
to major health problem (disability). Small risk of large
loss. Creates need for risk-pooling through insurance.
• But problems with voluntary insurance
– people may be myopic, underestimate risk, don’t purchase
enough insurance voluntarily
– Adverse selection—only those with health problems insure
voluntarily; this raises premium for average person
– Cherry-picking by insurance companies if allowed to exclude
• Mandatory insurance avoids these problems
– prevents poverty, maintains living standard of disabled
• But many pitfalls—1) disability difficult to measure, often
inaccurate; 2) moral hazard widespread; 3) systems can be very
costly; 4) labor supply and GDP reduced by system incentives
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Typical plan before recent reforms
• Usually handled by public system, even in countries with
multi-pillar systems (except Latin America)
• PAYG, so long-term costs are hidden
• Defined benefit, based on recent wages, even when old
age system is defined contribution
• Replacement rate often high in contributory plans >70%
• Worker presents case with evidence from own GP
• Pressure on agency to be sympathetic, so low denial rate
• Criterion: inability to do regular line of work
• Eligibility often stops if recipient earns wage—so
beneficiaries almost never go back to work
• Costs 1-6% of GDP, 1-10% of wages, 10-90% of OA costs
– Larger plans are in middle and high-income countries
– Low-income countries should be cautious, because of
problems and complexities of running disability plans
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Public and Mandatory Private Spending on
Incapacity as % of GDP, 1995-2005
(Source: OECD Social Expenditure Database 2008 (SOCX))
7
6
5
4
1995
3
2000
2005
2
1
0
4
Public + Mandatory Private Spending on
Disability/Old Age Spending, 2005
1.00
(Source: OECD Social Expenditure Database 2008 (SOCX))
0.90
0.80
0.70
0.60
0.50
0.40
Dis/OA
0.30
0.20
0.10
0.00
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Problems: 1. Disability is ambiguous,
subjective, difficult to measure
• Intended for cases where health issues severely limit work
– but little direct connection between observable medical diagnosis
and unobservable functional capacity
• Majority of new claims are due to psychiatric or muscularskeletal condition (arthritis, pain)-difficult to prove/disprove
• Limited information—traditionally, worker’s own GP
• So very prone to errors, high administrative costs
– U.S. audit found 48% false denials, 19% false approvals
– self-assessed disability compared with SSA decisions: 20% false
positives, 60% false negatives (Benitez-Silva et al 2004)
– In other high-income countries errors are around 40%
• What is “right” mix of false positives vs. false negatives?
• Should disability be treated as separate category or not?
• Well-trained examiners & administrators needed for
accurate assessment—scarce in low-income countries
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2. Moral hazard and agency problems
(insurance increases risky behavior)
• People who dislike their job are less likely to continue
working, more likely to collect benefit, when they have
health problem that is insured
• Doctors and gatekeepers may apply lax definitions of
disability to keep clients happy
• Employers use disability program to get rid of low
productivity workers
• Politicians use it to cut unemployment rate
• Unions use it as early retirement pathway
• Local governments use it to get people off welfare rolls
• Opportunities for moral hazard are increased by
ambiguous definition
• Important object of system design—keeping moral
hazard low by better information and incentives that
align interests of system and key decision-makers
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3. Systems are costly, costs are rising
• Costs <1% of GDP in low-income countries, 2-6% of GDP
(4-10% of wages) in high-and middle-income countries
(except LAC), highest in Nordic countries
• Rising costs in most countries, but dramatic cuts in some
(Netherlands, Poland)
• Why the rise and difference across countries and time?
• Population health and aging don’t play large role
• Many studies show applications and recipiency rates rise with
generous benefits, high replacement rates, lax screening (when
benefit goes up 10%, awards go up 3-4%, B&B 1999)
• High UnE rate, low UnE benefit increase disability recipiency
(workers lose jobs, can’t find new one, claim disability, keep it)
• Ambiguous definition and moral hazard add to problem
• Recent reforms have tried to tighten eligibility conditions,
increase information to screeners, reassess more
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frequently, change incentives facing workers
Disability benefit recipients as % of
population age 20-64, 1995 & 2008
(Source: www.oecd.org/els/disability)
12
10
8
6
4
1995
2008
2
0
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4. Systems reduce labor supply, GDP
• Studies show growth of disability system is a major
reason for declining lfpr among older men. Why?
– Benefit is for people who can’t work so applicants don’t work
– Benefit provides income that enables beneficiaries to work
less—income effect
– Beneficiaries face high implicit tax--benefit stops if they try to
work so they don’t try--work disincentive effect
– Skills depreciate while out of work so once people start
disability benefits they practically never return to work
– Many studies show higher benefits and lax screening reduce LFP
of men over age 45 (when benefit rises 10%, non-employment
rises 3%, Gruber 2000; when denial rate rises 10%, LFNP falls
2.7%, Gruber & Kubic 1997)
• Big policy push now is how to reduce disability inflow,
increase outflow, keep partially disabled on the job
Parametric reforms that increase
information & accuracy, decrease
moral hazard and costs
• Eligibility--moving toward any job, not regular job
• Benefit amount—often 70% RR, >80% for low
earners. Lower benefit decreases recipients,
increases work (but means less insurance)
• Screening—denial rate around 45% in OECD
–
–
–
–
Individual’s own GP or system doctors?
Who else participates? Employers? Voc. couns.? Ins. co.?
How to encourage self-selection (applicant bears part cost)
Stop easy entry through generous sick leave
• Avoid permanent disability, require reassessment
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Ex: Poland—temporary benefits
and better information
• In 1995 disability cost 5.7% of GDP, by 2005 only 2.7%.
Disability inflows fell 2/3. How did they accomplish that?
• Since 1999, almost all benefits are temporary
• System doctors can reassess and over-rule GP certifications
• Any job instead of own-job criterion
• Replacement rates reduced
• But—many successful appeals and re-applications, UnE
benefit recipients and early retirement pensioners increased
• Beneficiaries still lose benefits+child supplements if they
work—high implicit tax on work so few beneficiaries work
• Step in right direction but may reverse if ER pensions tighten
• Need better incentives, party with direct interest in cutting
costs, lower implicit tax
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Structural reforms:
• 1) large informational role to private parties
who have a pecuniary interest in controlling
costs (employers, insurance companies,
pension funds, voc. counselors)
• 2) eliminate implicit tax on work: beneficiaries
work, contribute to economy, keep benefit but
get part of income from wage (but this makes it
espec. important to label disabled correctly ex ante)
• Examples: Netherlands, Denmark, Australia, Chile
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Netherlands—employer responsibility
• In 1995 Netherlands had incapacity cost of 5.7% of
GDP (10% of payroll)
– Employers used dis. system to get rid of excess workers,
politicians to keep UnE low, unions for early retirement
• By 2005 cost fell to 4.3% of GDP. What did they do?
• Major responsibility for disability was shifted to
employers and private service providers
– employer bears full cost for 2 years of sick leave
– must use private occupational health services to
monitor absent workers and get them back to work
– this provides information about health of worker,
gives employer incentive to keep worker on job by
rehab and workplace modification
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Netherlands 2: wage supplements
• After 2 years of sickness leave, worker is assessed for
disability benefit
– if capacity loss is <35%, no disability benefit
– if capacity loss is 35-79%, worker gets wage
supplement if he continues to work partially
(wage subsidy instead of implicit tax)
– if he doesn’t work he gets lower flat benefit
– Employer finances this for first 10 years (by selfinsurance or experience rated external insurance)
– If capacity loss >79%, public system pays full benefit
• Assessment by social insurance doctors & voc expert
• Criterion: ability to do any job (not one’s regular job)
• Replacement rate reduced slightly
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• 2004-9: stock of beneficiaries < age 45 reassessed
Netherlands 3: success and problems
• Results—inflow into sick leave and disability fell sharply,
outflow rose, costs fell. Employers have incentive to
monitor worker, find job for him, provide information.
We don’t know if partially disabled work more.
• Potential problems: firms shift to temporary contract
workers who are not employer’s responsibility
• Employers try to avoid hiring high-risk and older workers
• Small and medium sized firms at a disadvantage
• High reporting and administrative costs for employer
• Reassessed workers may shift to other welfare programs
• Govt. has offset this with “no risk” policy—public system
covers temporary contract workers, small firms, newly
hired disabled workers (>50% of total in public scheme)
• Employer responsibility would not work well in countries
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with much casual temporary employment, small firms
Denmark—wage subsidies & flex jobs
• Concerned by rising absenteeism and costs,
reformed mid-2000’s
• Partially disabled get access to subsidized flex-jobs
(part time job for full pay) instead of benefits, hoping
to keep more disabled at work for partial benefit
• Administered by municipalities but center pays most
• Problems:
– many workers applied—but half of all flex jobs go to
workers already employed by firm on ordinary terms
– Not enough flex jobs to meet demand so long waiting list
developed (on full benefit)
– Number of full beneficiaries did not fall
– Shift from full time to subsidized part time workers, not
from full to partial beneficiaries. Costs rose.
• Need party with good information and strong
incentives to counter increased applications
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Australia—no benefits for partial disabled;
outcome-based fee for private voc
counselors
• Concerned by rise in beneficiaries and costs 1985-95,
so reformed system; costs began to fall
• Tightened criteria: Full disability benefits go only to
those unable to work >15 hours per week
• No dis benefits for partial disability; they get
temporary UnE benefit, retraining, job search
• Voc rehab by private companies, fee based on
employment outcomes—for 13 & 26 weeks of work
• Potential problems: do workers keep job for long
term, are they good jobs, do providers try to cream
healthy workers, implicit tax on work remains high,
espec. for potential low earners. Evaluation needed. 18
Chile—private pension funds provide
information, control costs
• Unlike most countries, disability benefits are partially
pre-funded and run by private sector (but regulated)
• Since 1981 old age pensions based on individual accounts
• IA’s also provide benefit if worker becomes disabled
– worker is promised replacement rate of 70% (50% if partial dis.)
– if money in account isn’t enough to cover benefit, it is topped
up by group insurance policy purchased by pension funds
• Pension funds and insurance companies have incentive
to keep approved claims and costs low—increases profits
• Assessments are made by Medical Board chosen by
public agency, but pension funds and insurance
companies participate in hearings, provide information,
ask questions, bring appeals
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Chile: no implicit tax on work
• If beneficiary works he keeps own-wage + benefit
• Results: low inflow into disability, lower costs, higher
accuracy than other countries or old system. In new
system (but not in OS), benefits go to most severely
disabled with highest mortality rates, yet work
propensities of dis. pensioners did not fall
• Prefunding through individual accounts further
reduces costs & claims in long run; higher cost due to
population aging is offset by more funds in account
• Problems: too many false negatives? pension funds
may try to cream low-risk workers?
– since 2008 all workers put into 1 insurance pool
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Lessons: 1) information and incentives
matter
• Keeping replacement rates low is most sure-fire way to keep
disability recipiency rates and costs low and employment
high—but this also means low insurance so not done much
• Careful screening is second important mechanism
–
–
–
–
–
object should be accuracy
should be based on capacity to do any job (not regular job)
should be done by system’s medical experts, not by own GP
two-sided appeals should be permitted
prepare for higher denial rate when early retirement is tightened
• Mobilize self-selection whenever possible
– allow sick and disabled workers to bear some cost—waiting
period, benefit <wage, retraining & job search required
– in IA systems, apply balance in account toward disability benefit
– smaller net gain will discourage healthier workers from applying
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Lessons: 2) avoid high implicit tax
on work for the partially disabled
• Total and permanently disabled should be a small group,
can be more objectively defined, given large benefit
• Majority of disabled should be partial and temporary:
can get transitional benefit, job search help, retraining
• If stay out of work for extended period, they will never
return, become dependent on benefits
• Important to avoid high implicit tax--give modest benefit
that they keep for several years, even if they work
• Maybe subsidize wage to offset lower productivity (but
employers & workers may overuse—careful targeting needed)
• Periodic reassessment of beneficiaries is essential (but
this conflicts with elimination of implicit tax)
• Difficult to get it right
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3) Give key party financial incentives to
provide information, control costs
• Involvement of private sector
– Employers in Netherlands, pension funds in Chile,
private service providers in Australia
– This provides detailed information, targeting
– But leads to selection/creaming/hiring issues
• Coordinate disability benefit with unemployment
and early retirement benefit, to minimize spillover
effects and benefit shopping.
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4) Disability in low and middleincome countries
• Disability systems are complex to design,
require skilled personnel. Low and middleincome countries with scarce human capital
should be cautious: small system with modest
benefits based on clear-cut medical
conditions.
• They should set up structures and procedures
that will avoid poor information, perverse
incentives, high costs and low LFP in the
future.
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