Why Does Disability Increase During Recessions? Evidence from Medicare

Social Security Disability Insurance (DI) awards rise in recessions and fall in expansions, especially for older adults. Using Medicare administrative data for DI entrants between 1991 and 2015, we provide new evidence on the health of DI recipients who enter at different ages and points in the business cycle. We find that each percentage point increase in unemployment at the time of application corresponds to 4.2% more awards and 0.4% lower Medicare spending among new entrants. We then investigate whether this relationship is driven by changes in health, with deteriorating economic conditions making individuals less healthy, or by changes in the cost of entering DI. To separate these two channels, we leverage a feature of the DI determination process that sharply relaxes the eligibility criteria at ages 50 and 55. We find that marginal DI entrants have similar spending regardless of whether they were induced to enter by poor economic conditions or by the age discontinuities in the eligibility criteria. The findings suggest that changes in entry costs can fully account for cyclical DI entry