The Journal of the American Medical Association (2016), Vol 315, No. 14
Tax and transfer programs insure labor market risks by (i) replacing lost earnings with increased transfers, (ii) providing a stream of transfer income not sensitive to earnings declines, and (iii) charging progressive tax rates that decline with income. This paper examines the distribution of income risk that adults face from severe illness and the social insurance provided by taxes and transfers, using an event study research design with linked Canadian hospital and tax records. I find that adults with lower incomes face larger pre-tax earnings risk from hospitalization events, primarily due to extensive margin exits from employment. Canada’s tax and transfer system insures 44% of post-hospitalization income losses in the bottom income quintile and 12% of losses in the top income quintile. But less than two thirds of this insurance comes from replacing lost earnings with increased transfers. In the bottom income quintile, 30% of insurance is due to a stable stream of transfers; in the top income quintile, 30% of insurance is due to progressive taxation. Using a calibrated model, I find that the marginal value of additional insurance against hospitalization risk is approximately flat across the income distribution. Together, these findings underscore the importance of considering redistributive taxation as part of the social insurance system.
This paper shows that employer-provided short-term disability insurance (STDI) increases long-term disability insurance (LTDI) take-up and imposes a negative fiscal externality on the government budget. Expanding private STDI has been touted as a way to lower public LTDI costs by giving employers a financial incentive to provide workplace accommodations. But private STDI can also raise public LTDI costs, since STDI generates moral hazard by providing benefits during the waiting period for LTDI. Using variation in private STDI coverage caused by Canadian firms ending their plans, I find that the moral hazard effect dominates and private STDI raises two-year flows onto LTDI by 0.07 percentage points (33%). Extrapolating to Canada's entire population, private STDI generated 18,300 LTDI recipients and CA$230 million dollars (5%) of public LTDI spending in 2015. The efficient Pigouvian tax on Canadian private STDI that internalizes this externality is approximately CA$35 per insured worker.
Job loss and illness are the two largest risks faced by prime age workers, and unemployment insurance, health insurance and disability insurance constitute the bulk of government social insurance expenditures. This paper contrasts the distribution of income risk that adults face from job displacements and hospitalizations and examines how well those risks are insured by tax and transfer programs. Both job displacements and hospitalizations generate large declines in earnings that persist for at least five years. I show that earnings losses following job displacements are predominantly due to intensive margin earnings losses among workers with above-median income prior to displacement. By contrast, earnings losses following hospitalizations are predominantly due to extensive margin earnings losses concentrated among lower-income workers. I find that Canada’s progressive tax and transfer system provides substantially more insurance against the income risks of hospitalizations than job displacements. The discrepancy in the social insurance for these risks is caused by a lack of wage insurance and because job displacements affect higher income individuals who derive the bulk of their income from wages.