Disability Insurance in an Individual Account System1

Many countries have adopted old age systems that include individual accounts— funded, privately managed defined contribution plans. It is difficult to incorporate disability benefits into a social security system with a defined contribution component, since disabled people may not work long enough to accumulate large balances. The system might generate reasonable replacement rates for workers who contribute throughout their lifetimes, but very low replacement rates for those who become disabled when young. Yet, if disabled people continue to receive their benefits from the traditional pay-as-you-go (PAYG) system, this will take an increasingly large percentage of total social security taxes in the future. Moreover, it may encourage workers with small accumulations to apply for disability rather than old age benefits, which will raise taxpayer costs further. Beyond these problems of integration, disability is a more subjective condition than old age, and such programs are therefore prone to errors of over- or under-exclusion. The procedures used to evaluate claims can influence this balance and through it the costs and equity of the program. (see Autor and Duggan 2006). It is important to solve these problems, since disability often takes 20-30 % of tota