How Private Short-Term Disability Insurance Affects Public Disability Benefits

Forty percent of American workers have access to employer-provided short-term disability insurance (STDI). This insurance generally pays benefits to disabled workers during the five-month waiting period between the onset of disability and the start of Social Security Disability Insurance (SSDI) benefits. By providing income during the waiting period, STDI can encourage more disabled workers to apply for SSDI, which will lead to more SSDI awards. However, employers who offer STDI have a stronger financial incentive to provide accommodations to workers with disabilities to help them stay on the job instead of taking STDI benefits, which could reduce SSDI claims and rewards.

Examining the effect of STDI access on SSDI applications and rewards is difficult because workers with and without STDI access may differ in ways that affect their likelihood of using SSDI. In The Long-Term Externalities of Short-Term Disability Insurance (NBER RDRC Working Paper 21-10), researcher Michael Stepner provides evidence from Canada on the effect of employer-provided ISTI on disability insurance of long duration (ILLD) public.

The author focuses on Canadian companies that are ending their STDI programs. By comparing employees whose companies have just terminated their STDI plans to employees whose companies are about to terminate STDI, he is able to isolate the effect of STDI coverage on LTDI reception. To undertake this analysis, the author constructs a new dataset of linked Canadian tax and administrative benefit records that includes STDI coverage and LTDI reception for the entire population for the period 2000 to 2014. Nearly 6,000 companies terminated their STDI plans during this period.

The first finding is that when a company stops providing STDI to its employees, the likelihood of the company’s employees having STDI decreases by 61 percentage points. The effect is not 100 percent because some employees were not covered by the STDI plan, while others continue to have STDI coverage through another employer.

Employees whose companies stop providing ISTD are 0.040 percentage points less likely to receive ILD two years later than employees with continued ISTD coverage. Combining this with the first estimate, this implies that having STDI coverage increases the likelihood of receiving LTDI by 0.07 percentage points, or a 33% increase.

These results indicate that employee response to having benefits during the waiting period dominates the effect of any increase in workplace accommodations associated with ISTD. The provision of STDI by employers therefore increases public spending on LTDI. The author estimates that if no Canadian employer had provided STDI between 2000 and 2014, there would be 18,300 fewer recipients in 2015 and government spending on LTDI would be C$230 million, or 5% less. In order for employers to meet the additional public expenditure incurred due to the provision of STDI, the government should impose a tax of C$35 per insured worker per year.

Reflecting on the implications of this study for active policy discussions, the author notes that some analysts have “proposed that universal private IVST would result in more workers with work limitations receiving help and returning to work.” work and thus reduce long-term disability rates and costs. This paper shows that the opposite is true and that expanding private STDI would increase public spending on LTDI.


Financial support was provided by the Social Sciences and Humanities Research Council of Canada. The views expressed in this document do not necessarily reflect the views of Statistics Canada or any other department of the Government of Canada. The research reported here was conducted under US Social Security Administration (SSA) grant RDR18000003 funded through the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the views or policies of the SSA, any federal government agency, or the NBER. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal responsibility or liability for the accuracy, completeness or usefulness of the content of this report. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation, or favor of the United States Government. or any agency thereof.

About Antoine L. Cassell

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