Disability Insurance Incentives and the Retirement Decision: Evidence from the United States

A rising share of older workers in the United States makes use of the Disability Insurance (DI) program in their transition to retirement, with about one in seven men and one in nine women between the ages of 60 and 64 now enrolled in the program. This study explores how financial incentives from Social Security and DI affect retirement decisions, using an option value approach. We find that financial incentives have a significant effect on retirement, particularly for those who are in poor health or who have low education, who may be more actively considering retirement at younger ages. Simulations suggest that increasing the stringency of the screening process for DI would increase the expected working life of DI applicants.