Disability and Distress: The Effect of Disability Programs on Financial Outcomes

We present the first estimates of the effect of disability programs on markers of financial distress: bankruptcy, foreclosure, and the sale of a home. To estimate the causal effect of disability programs on these outcomes, we use an age-based eligibility rule to implement a regression discontinuity design. We find that disability allowance at the initial level reduces the likelihood of foreclosure by 2.8 percentage points (54 percent) and the likelihood of bankruptcy by 0.76 percentage points (29 percent) over the next 3 years. Initial allowance onto disability programs also increases home purchases by 1.0 percentage point (22 percent) and decreases home sales by 2.6 percentage points (20 percent). We present evidence that liquidity is the most likely channel for these effects, meaning that the results reflect a reduction in financial distress and an improvement in recipients' welfare.