Welfare Effect of Introducing a DI Mandate
Privatizing Disability Insurance
Public disability insurance (DI) programs in many countries face pressure to reduce their generosity in order to remain sustainable. In this paper, we investigate the welfare effects of giving a larger role to private insurance markets in the face of public DI cuts. Exploiting a unique reform that abolished one part of the German public DI system for younger cohorts, we find that despite significant crowding-in effects, overall private DI take-up remains modest. Moreover, private DI tends to be concentrated among high-income, high-education, and low-risk individuals. We do not find any evidence of adverse selection on unpriced risk. Finally, we estimate individual insurance valuations via a revealed preferences approach, a key input for welfare calculations. Taken at face value, the low observed willingness to pay of many individuals implies that providing coverage partly via a private DI market with choice improves welfare. However, we show that distributional concerns as well as individual risk misperceptions can provide grounds for justifying a full public mandate.