Fundamentally Reforming the DI System: Evidence from German Notch Cohorts
This paper studies how the private DI market and consumers responded to a reform that abolished public occupational disability insurance (ODI) for German cohorts born after 1960. The first part shows a causal reduction in overall DI inflows by more than 30% in the long-run. The second part studies the private individual risk-rated ODI market. Representative data do not show substantial increases in take-up. A general equilibrium model featuring the social safety net, asymmetric information and administrative costs can rationalize these weak private-public interactions as well as stylized facts such as strong private ODI take-up gradients by income and health. It also simulates policies that could have increased take-up further in the course of the reform and assesses their welfare effects. However, although welfare improving, none of the feasible reforms would have increased take-up to more than 60%.
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