Many developed countries have responded to increases in disability insurance enrollment by tightening eligibility criteria and removing current recipients. Using Australian administrative data, we evaluate the effects of this increased stringency in Australia’s Disability Support Pension (DSP) on the earnings, income, and health care utilization of disability recipients. We take advantage of a 2014 reform that tightened eligibility criteria for current recipients based on birth date and date of DSP entry. We find that removing young beneficiaries from DSP leads them to replace about one-half of the lost DSP income with income from other government programs (primarily Newstart Allowance) and another one-third with labor market earnings. In addition, spouses and parents of DSP recipients have strong labor market responses to the individual’s DSP removal. As a result, on net we estimate that DSP removal has no effect on total household income. Turning to health care utilization, we find an increase in the use of prescription drugs, driven by drugs used to treat mental health conditions, especially antipsychotics. Evidence suggests that the most likely explanation for the increase in antipsychotic prescriptions is the loss of DSP benefits and the resulting shift to work. We discuss the welfare implications of our findings.

Dr Manasi Deshpande is an associate professor of economics with tenure at the University of Chicago Kenneth C. Griffin Department of Economics and a research associate at the National Bureau of Economic Research. Her research interests include the optimal design of social safety net programs, their interaction with labor markets, and their effects on consumption, health, and well-being. She has received the Alfred P. Sloan Research Fellowship, NSF CAREER award, and William T. Grant Scholarship. Her dissertation on the long-term effects of disability programs received the 2015 APPAM Dissertation Award, the 2015 Upjohn Institute Dissertation Award, and the 2016 NASI John Heinz Dissertation Award. She holds a Ph.D. in economics from the Massachusetts Institute of Technology and was previously a postdoctoral fellow at the National Bureau of Economic Research and the Becker-Friedman Institute.

Co-authors are Greg Kaplan, Tobias Leigh-Wood and Yalun Su.

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