Social Security Programs and Retirement around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms

Overview

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 ...

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Overview

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.

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Meet the Author

David A. Wise is the John F. Stambaugh Professor of Political Economy at the Kennedy School of Government at Harvard University. He is the area director of Health and Retirement Programs and director of the Program on the Economics of Aging at the National Bureau of Economic Research.

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Social Security Programs and Retirement around the World

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

The University of Chicago Press

Copyright © 2012 National Bureau of Economic Research
All right reserved.

ISBN: 978-0-226-90309-5


Chapter One

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. 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. Both schemes still exist today and have only been marginally changed over time. 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 fl at-rate benefits represented a large replacement rate.

Second, the UK system has not formally recognized permanent disability conditions. The benefit set up in 1948 was called Sickness Benefit and offered a benefit with unlimited duration. Hence the coverage for disability was not distinguished from short-term sickness, and only duration of claim could distinguish the long-term sick from the short-term sick.

Table 1.1 presents the evolution of these schemes from 1948 to 2010 according to duration of incapacity, while table 1.2 summarizes the changes to the generosity of these sickness and disability schemes. In 1971 Invalidity Benefit (IVB) was split from the Sickness Benefit but still followed the structure inherited from the previous scheme, whereby entry to IVB would be offered to those who had been on sickness benefits for longer than twenty-eight weeks. The IVB offered a higher level of benefit than the Sickness Benefit but without imposing another health test when entering IVB. The screening process at the time relied on a medical assessment by a personal doctor of the ability to conduct "suitable work."

In 1983, a major reform that was introduced to transfer administration of sick pay claims from Sickness Pay to employers for the first eight weeks of sickness, was increased to twenty-eight weeks in 1986. Employers were mandated to pay Statutory Sick Pay (SSP), payments that would be reimbursed by the government through lower National Insurance contributions. For those who would not qualify for SSP, the Sickness Benefit was still available.

The number of claimants increased slowly until the mid-1980s for the older working-age individuals, when a sharp increase of IVB recipients was registered for all age-groups. One can see in figure 1.1 and figure 1.2 the number of IVB recipients as a share of the fifty-five to fifty-nine, sixty to sixty-four, and sixty-five to sixty-nine age-groups for men and women. Between 1985 and 1996, the share of the fifty-five to fifty-nine-year-old men on IVB almost doubled, from 10.9 percent to 20.0 percent.

In 1995 a reform was introduced that replaced the IVB and the Sickness Benefit schemes with the Incapacity Benefit (IB). This maintained the "own occupation test" to qualify for the first twenty-eight weeks of incapacity, but replaced the "suitable work test" of IVB with an "all work test" to qualify for the higher rate IB. This new medical screening was also removed from personal doctors and was instead administered by medical staff at the regional level and commissioned by the scheme's administration. The growth of the IB roll was stopped, even slightly reversed, but the stock remained high, especially for younger individuals. In addition to these changes, IB was no longer paid to new claimants above the state pension age (sixty-five for men and sixty for women, at the time). Previously, individuals typically preferred to stay on IVB than to receive the basic state pension, as the latter is taxable whereas the former was not. The new IB benefit excludes those above the state pension age (at the time sixty for women and sixty-five for men) and is treated as taxable income. This is why the number of claimants of IB aged above the state pension age drops markedly after the 1995 reform in figures 1.1 and 1.2.

The 1999 Welfare Reform and Pensions Act introduced further changes, with a tightening of the health test from April 2000 onward and a reduction in the generosity of IB from April 2001. The new health test is called Personal Capability Assessment, which is designed to assess capacity for paid work instead of checking incapacity for work and is therefore supposed to foster a return to work. The reform also increased the eligibility requirement for IB from having paid contributions in any year before the start of incapacity to having paid sufficient contributions in one of the last three years. Finally, it introduced means testing of IB with regard to individual private pension income at a rate of 50 percent above £85 a week.

In 2003 the New Labour government decided to pilot an ambitious, and expensive, program to incentivize IB claimants to return to work called Pathways-to-Work. The program included increased conditionality with mandatory work-focused interviews, increased financial incentives to return to work, and increased support with the provision of voluntary schemes designed to help disabled individuals to return to work. The scheme was evaluated in pilot areas and then expanded to the rest of the country (Adam, Bozio, and Emmerson 2012).

In 2008 the government announced a new scheme to replace IB, the Employment Support Allowance (ESA) for new claimants. This new scheme incorporated a stricter eligibility health test along with a redesign of the benefit rates. In the first thirteen weeks of claim, the claimant is subjected to a Work Capacity Assessment, which determines whether the individual is entitled to ESA. Among those found eligible for ESA, the Work Capacity Assessment distinguishes between those who have "limited capacity to work and are unable to follow work-related activities" and the remainder who have "limited capacity to work but are able to follow work related activities." For the last group claimants are mandated to attend the Pathways-to-Work program. The ESA will be progressively applied to all existing IB claimants; that is, existing claimants are going to be retested for the stricter eligibility between October 2010 and 2014.

1.2.3 Non-contributory Benefits

Whereas the previous disability benefits are only available to those who have a sufficient National Insurance contribution record, a set of benefits were created in the 1970s for individuals of working age, with congenital disabilities, and who did not qualify for the contributory scheme. In 1975 the Non-Contributory Invalidity Pension (NCIP) was introduced, offering a benefit of 60 percent of IVB to men or single women. In 1977 the scheme was extended to married women who were "incapable of performing normal household duties" under the name of Housewife Non-Contributory Invalidity Pension (HNCIP), but at a lower rate than the NCIP. Both NCIP and HNCIP were replaced in 1984 by the Severe Disablement Allowance (SDA), which stopped the distinction that it was deemed discriminatory against women. It was subsequently abolished in 2001 for new claimants.

In the 1970s a number of schemes were also designed to offer benefits to compensate the extra cost endured by disabled individuals, either in the form of carers or the extra cost of mobility. In 1971 the Attendance Allowance (AA) was created for those who required personal assistance and in 1976 a Mobility Allowance (MA) was introduced for those who had difficulty moving around. Also in 1976 an Invalid Care Allowance (ICA) was introduced for those who could not work because they had to stay at home to care for a disabled relative. In April 1992 the Disability Living Allowance (DLA) replaced MA and AA for those who had become disabled before the age of sixty-five, while AA was kept for those aged over sixty-five. In terms of total expenditure, DLA represents the biggest transfer targeted toward people with disability in the United Kingdom. In 2006 to 2007 it represented £9 billion of expenditure, approximately 0.7 percent of national income. If one adds the £4 billion of AA and £1.2 billion of CA, the non-contributory disability benefits represent more than 1.0 percent of national income. In the June 2010 budget, the government announced plans to cut DLA spending significantly by reassessing the health of existing claimants.

1.2.4 Means-Tested Benefits

A number of means-tested benefits targeting poor households have provisions that include premiums for disability. Income Support (IS) on grounds of disability, for instance, offers a premium for low-income households containing at least one disabled individual.

(Continues...)



Excerpted from Social Security Programs and Retirement around the World Copyright © 2012 by National Bureau of Economic Research. Excerpted by permission of The University of Chicago Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


Acknowledgments

Introduction and Summary
Kevin Milligan and David A. Wise

1. Disability, Health, and Retirement in the United Kingdom
James Banks, Richard Blundell, Antoine Bozio, and Carl Emmerson

2. Disability Insurance, Population Health, and Employment in Sweden
Lisa Jönsson, Mårten Palme, and Ingemar Svensson

3. Health, Disability, and Pathways into Retirement in Spain
Pilar García-Gómez, Sergi Jiménez-Martín, and Judit Vall Castelló

4. Health Status, Welfare Programs Participation, and Labor Force Activity in Italy
Agar Brugiavini and Franco Peracchi

5. Disability Programs, Health, and Retirement in Denmark since 1960
Paul Bingley, Nabanita Datta Gupta, and Peder J. Pedersen

6. Disability in Belgium: There Is More Than Meets the Eye
Alain Jousten, Mathieu Lefebvre, and Sergio Perelman

7. Disability, Pension Reform, and Early Retirement in Germany
Axel Börsch-Supan and Hendrik Jürges

8. Disability and Social Security Reforms: The French Case
Luc Behaghel, Didier Blanchet, Thierry Debrand, and Muriel Roger

9. Disability Insurance Programs in Canada
Michael Baker and Kevin Milligan

10. The Long-Run Growth of Disability Insurance in the United States
Kevin Milligan

11. Disability Pension Program and Labor Force Participation in Japan: An Historical Perspective
Takashi Oshio and Satoshi Shimizutani

12. Disability Insurance and Labor Market Exit Routes of Older Workers in the Netherlands
Klaas de Vos, Arie Kapteyn, and Adriaan Kalwij

Contributors
Author Index
Subject Index

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