Using a Life-Cycle Model to Predict Induced Entry Effects of a $1 for $2 Benefit Offset in the Ssdi Program

This paper uses a life cycle model to predict the induced entry effects of a reduction in the effective tax rate applied to Social Security Disability Insurance recipients from 100% under the status quo to a 50% tax rate (i.e. $1 dollar benefit reduction for every $2 earned over a disregard level known as the substantial gainful activity ceiling). The Social Security Administration is required to evaluate the induced entry effects via a large scale controlled experiment under the 1999 Ticket to Work and Work Incentives Improvement Act. Yet, due to the inherent limitations and high costs of randomized experiments, it is unlikely that SSA will actually ever carry out the experiment. This paper provides an alternative methodology and argues that it can be a cost effective and credible alternative to large scale controlled experiments. The life cycle model predicts that the $1 for $2 offset will result in significant labor supply by DI recipients (mostly via part time work to supplement their DI benefits), but the induced entry effect will be small. This is due to the fact that the disutility of labor supply is high, and the 50% effective tax rate under the $1 for $2 offset is still very high. On net, the $1 for $2 offset is not sufficiently attractive ex ante to attract a significant number of new entrants into the DI program. Our forecasts of the induced entry effect are in between independent forecasts made by the Congressional Budget Office and the Social Security Administration