Harsh occupations, health status and social security

We study the optimal design of a social security system when individuals differ in health status and occupation. The health status is private information but is imperfectly correlated with occupation: individuals in harsh occupations have a higher probability of being in poor health. We explore the desirability of allowing the social security policy to differ by occupation and compare the results with those obtained if disability tests are used instead. We show that tagging by occupation is preferable to disability testing when the audit technology is relatively expensive and/or the ratio of disabled to healthy workers is significantly different across occupations. We also study the implications of imposing horizontal equity among disabled workers in different occupations and show that the disabled workers in harsher occupations may be induced to retire later.