To counter increased enrollment in disability insurance (DI) programs in recent decades, many developed countries, including the Netherlands, Sweden, the UK, Germany, and Australia, implemented reforms to limit access to DI and to remove existing beneficiaries. Similar reforms have been proposed in other countries, including the United States.
While research has shed some light on the effects of such reforms on work participation, a full assessment requires analysis of effects on household income and overall well-being. This work addresses that gap by estimating the effects of DI crackdowns on a wide range of recipient outcomes, including household income and health care usage. The authors employ data from the Australian Disability Support Pension (DSP), a means-tested program with no work history requirement, which tightened its medical criteria in 2012 due to rising enrollment. In 2014, these stricter standards were also applied to existing DSP recipients through medical reviews, specifically targeting younger individuals who initially received DSP after January 1, 2008, and who turned 35 after July 1, 2014.
By linking DSP recipients to family members using newly available administrative data, the authors analyze the impacts on household income, which includes the recipients’ own earnings, government benefits, and those of their family members, as well as health care usage, such as medical visits and prescription drug consumption. They find the following:
- On average, the removal of DSP does not significantly impact household income; in some cases, it even results in a net positive outcome. Recipients manage to recover approximately 55% of their lost benefits by accessing other government programs, and recover about 35% by increasing their work hours, typically in low-skilled positions. Family members also contribute to income recovery, with parents of recipients replacing 35% of lost DSP benefits and spouses replacing 15%.
- However, family structure is key. For the 43% of individuals living with family, income increases as their family members offset the DSP loss through higher earnings. In contrast, the 57% of individuals living alone do not benefit from family support, do not increase their own earnings, and experience a reduction in household income, relying heavily on other government programs to replace about two-thirds of their lost DSP benefits.
- Additionally, DSP removal is associated with a significant increase in prescriptions for mental health drugs, particularly antipsychotics, especially for men and individuals living alone. Specifically, the likelihood of receiving a mental health prescription rises by 23 percentage points, with a similar increase for antipsychotic prescriptions.
The authors suggest three possible mechanisms for the increase in mental health drug prescriptions: an income effect (greater drug use can increase productivity or make work easier), an incentive effect (to the extent that disability benefits discourage treatment, removal could reduce disincentives to seek treatment), and a stress effect (where the stress of losing income prompts increased medication use). The evidence leans toward the stress effect.
Bottom line: DI crackdowns may have very different effects depending on what kind of informal safety net recipients have access to. For those with family support, family members may be able to make up the lost income and mitigate the effects on the recipients. But for those without an informal safety net, the effects are potentially quite negative. As for encouraging work among those capable of work, again, those living with family members worked modestly more and mostly in low-skilled occupations, while those living alone did not work more and turned to mental health drugs to cope with the income loss. For policymakers, the message here is that focusing on average effects may lead to a misunderstanding of overall welfare implications, since average effects may mask a wide range of actual effects—from very positive to very negative.