National Bureau of Economic Research Conference Report

Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms

David A. Wise

• Publisher: University of Chicago Press
• Year: 2012
• ISBN:
  9780226921952
• Topic: Business
• Subtopic: Business General
• Index: Business

In nearly every industrialized country, large aging populations and increased life expectancy have placed enormous pressure on social security programs—and, until recently, the pressure has been compounded by a trend toward retirement at an earlier age. With a larger fraction of the population receiving benefits, in coming decades social security in many countries may have to be reformed in order to remain financially viable.This volume offers a cross-country analysis of the effects of disability insurance programs on labor force participation by older workers. Drawing on measures of health that are comparable across countries, the authors explore the extent to which differences in the labor force are determined by disability insurance programs and to what extent disability insurance reforms are prompted by the circumstances of a country's elderly population.

1

Disability, Health, and Retirement in the United Kingdom

James Banks, Richard Blundell, Antoine Bozio, and Carl Emmerson*

1.1 Introduction

Two potentially contradictory trends have been identified as populations around the world have been aging in recent years. On the one hand, improvement in health has led to nonabated increases in life expectancies. On the other, health conditions and disability have become seen, more than ever, as the main obstacle to longer working lives. This apparent paradox is at the core of policies aiming to encourage longer working life as various institutional settings (state pensions, disability benefits, and unemployment insurance) interact with changes in health status and labor market conditions. Previous research has highlighted the impact of financial incentives of pension systems across a number of developed economies (Gruber and Wise 1999, 2004) but much less is known on the role that other pathways to retirement and changes in health conditions have played.

The United Kingdom is a fine example of these interactions. With stricter unemployment benefits and relatively few early retirement schemes (Banks et al. 2010), disability benefits have over time come to represent an important pathway to retirement. At the same time, life expectancy has been rising continuously while measures of self-reported health or disability do not seem to exhibit similar improvements. As a result, disability benefits have come to the top of the policy agenda with reforms following each other at a very rapid pace since the mid-1990s: a major reform in 1995 was followed by important changes in 2000, 2001, 2003, 2006, 2008, and most recently 2010.

When one considers the degree of policy interest for this issue, one could be surprised at the limited literature on the subject in the United Kingdom. The main reason behind this is not the lack of interest from economists, but more the lack of suitable data that combine information on the labor market situation and comprehensive measures of health and disability. Most early research had to rely on self-reported measures of incapacity for work and benefit receipts. The obvious problem is that self-reported measures of disability could be affected by benefit receipt and therefore offers limited explanatory power (Myers 1982; Bound 1991). The main result from this early literature (Doherty 1979; Fenn 1981; Piachaud 1986; Disney and Webb 1991) was that both disability benefits and self-reported disability were linked to the labor market conditions: increased unemployment seemed to lead to an increased number of claimants of disability benefits and increased self-reported disability. More recent research (Benítez-Silva, Disney, and Jimenez-Martin 2010) has confirmed this relationship between the business cycle and the incidence of self-reported disability and provided more insights to the mechanisms involved, showing that unemployment had a large impact on the outflow rate out of disability benefits. Increasingly, researchers have tried to go beyond measures of self-reported health to capture the impact of more objective measures of health shocks. Disney, Emmerson, and Wakefield (2006) have, for instance, used panel data to construct instruments for self-reported health, showing that health shocks were important predictors of movements in and out of paid work among those approaching the state pension age in the United Kingdom. In an alternative approach, anchoring vignettes have been used to try and control for group or country-specific reporting effects on subjective health and work disability, with particular application to international comparisons (see Kapteyn, Smith, and van Soest [2007] or Banks et al. [2008], for example).

This chapter examines changes in health and disability-related transfers in the United Kingdom over the last thirty years, and describes how they are related to changes in labor force participation. The objective is to present a comprehensive description of the reforms to the institutional setting, along with available time series coming from administrative data on benefit receipt, cross-section or panel data on self-reported health, and their interactions with labor force status. By providing systematic evidence on institutions and data, we hope to help future research by providing a fuller picture of the trends over this period. We also present evidence on the impact of two large reforms to disability benefits that help shed light on the long-term changes in disability prevalence in the United Kingdom.

Section 1.2 presents the evolution of transfers targeted toward people with disabilities in the United Kingdom, focusing on recent reforms and the distinctive features of these benefits compared to their equivalent in other countries. Section 1.3 shows the evidence available on the different pathways to retirement in the United Kingdom, while section 1.4 presents evidence on various health measures, including mortality and self-reported health, and contrasts these evidences with labor market outcomes. Section 1.5 presents evidence on two major reforms of the UK disability benefit system, the 1995 reform and the more recent “Pathways-to-Work” program. Section 1.6 concludes.

1.2 History of Transfers Targeted Toward People with Disability in the United Kingdom

Disability is a difficult characteristic to define. The traditional approach in the literature has rested on the pioneering work from Nagi (1965, 1991) who identified three components of disability: a pathology, an impairment, and an inability to perform expected activities.¹ This approach leads to the view of disability as a permanent condition, completely separated from sickness, which is defined as a temporary incapacity. This distinction between permanent and temporary conditions has not been instrumental in the design of the UK benefit system. Historically, as this section will describe in more detail, sick and disabled individuals were all covered by sickness benefits, the only distinction coming from the duration of claims. As a result, the focus has been more on long-term sickness than on disability. In order to facilitate the comparison with other countries, we present the benefits available both to the short-term sick and to the long-term sick or disabled.

Transfers targeted toward the long-term sick or disabled in the United Kingdom are a complex set of benefits that have evolved over time and have been relabeled multiple times. To clarify this institutional setting with a jungle of acronyms, it is helpful to distinguish four types of disability benefits: work-related injury benefits, disability insurance, non-contributory benefits, and means-tested benefits (Creedy and Disney 1985; Burchardt 1999).

1.2.1 Work-Related Injury Benefits

Compensatory benefits, for injuries at work or during wars, were historically the first ones to be implemented in the United Kingdom with the enactment in 1897 of the Workmen’s Compensation Act, which established the legal liability of employers to compensate employees for loss of earnings capacity as a result of an accident or disease linked to employment (Walker 1981; Walker and Walker 1991). During World War I a state scheme, the War Disablement Pension, was introduced to offer compensation to veterans of Her Majesty’s (H.M.) Armed Forces. It was followed in 1948 by the Industrial Injuries Disablement Benefit (IIDB), set up by the National Insurance Industrial Injury Act 1946.² Both schemes still exist today and have only been marginally changed over time.³ They offer more generous benefits than other disability benefits, are not means-tested, and can be cumulated with other benefits.

1.2.2 Disability and Sickness Insurance

The second type of disability benefits is earnings replacement benefits. The UK schemes share some characteristics of other countries’ sickness and disability insurance but also have two defining features inherited from their origin.

First, they are not really insurance schemes, as generally understood. The welfare system put in place in the United Kingdom in 1948 largely followed the design of the Beveridge report (Beveridge 1942). It relied on an insurance principle, whereby eligibility to benefits was determined by contribution requirements, but benefits were not earnings related, unlike the US Social Security Disability Insurance (SSDI) or examples in Continental Europe. As a result, the system has largely been targeted at low income individuals for whom ...

Table of contents

• Cover
• Copyright
• Title Page
• Series Page
• National Bureau of Economic Research
• Relation of the Directors to the Work and Publications of the National Bureau of Economic Research
• Contents
• Acknowledgments
• Introduction and Summary
• 1. Disability, Health, and Retirement in the United Kingdom
• 2. Disability Insurance, Population Health, and Employment in Sweden
• 3. Health, Disability, and Pathways into Retirement in Spain
• 4. Health Status, Welfare Programs Participation, and Labor Force Activity in Italy
• 5. Disability Programs, Health, and Retirement in Denmark since 1960
• 6. Disability in Belgium: There Is More Than Meets the Eye
• 7. Disability, Pension Reform, and Early Retirement in Germany
• 8. Disability and Social Security Reforms: The French Case
• 9. Disability Insurance Programs in Canada
• 10. The Long-Run Growth of Disability Insurance in the United States
• 11. Disability Pension Program and Labor Force Participation in Japan: An Historical Perspective
• 12. Disability Insurance and Labor Market Exit Routes of Older Workers in the Netherlands
• Notes
• Contributors
• Author Index
• Subject Index