Retirement Round-bout: Early Exit Channels and Disability Applications

Disability pension benefits are governed by an application-approval procedure. Therefore, explanatory variables can have different effects on the application probability and on the actual disability transition probability. If the application phase is not considered, the estimation ignores the rejection probability and the possible difference in timing of the application and the transition. As many data sets don't have information on multiple spells of unemployment, most of the estimations also ignore the fact that many aged unemployed experience multiple transitions in and out from unemployment at the end of the career. We show that dividing the disability transition to the application phase and the transition phase can alter the results. If we lump the two phases together, we are likely to get the estimates in the middle. Because the policy to affect the application probability can differ from the needed policy to affect the transitions, it is important to take this difference into account. The multiple spells of unemployment at the end of the career, in contrast, didn't seem to make a huge difference in the estimations. We found that single spell models capture quite well the effects of the explanatory variables on the unemployment probability.