The Effect of Disability Payments on Household Earnings and Income: Evidence from the SSI Children’s Program

Disability programs have expanded rapidly in recent decades across the developed world. Despite substantial evidence on the effects of these programs on labor supply, less is known about their effects on household income and consumption, or the extent to which labor supply discouragement is driven by income versus substitution effects. The Supplemental Security Income (SSI) children’s program, the rapidly expanding means-tested disability program for children in the United States, has been singled out among social insurance programs for the potentially grave consequences of its incentive effects. In this paper, I use variation in continuing disability reviews to identify the effect of the SSI children’s program on household outcomes. I find that the loss of $1000 in the child’s SSI payment increases parental earnings by at least $600, with even greater responsiveness for certain subgroups. This estimate is much larger than the few existing estimates of the elasticity of earnings to unearned income. Using the unique institutional context of the SSI children’s program, I determine that this labor supply discouragement effect is driven largely by an income effect. In contrast to households’ dramatic substitution to earned income, I find that the loss of the child’s SSI payment discourages disability applications by other family members, suggesting that the loss leads households to update their beliefs about disability insurance as reliable source of income. Finally, I find evidence of the importance of household-level shocks in the decision to apply for disability insurance.