Deshpande 2016b — Does Welfare Inhibit Success The Long-Term Effects of Removing Low-Income Youth from the Disability Rolls

Summary

Exploits a regression discontinuity (RD) created by the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) 1996: children born on or after August 22, 1996 faced a mandatory age-18 medical review under the stricter adult Supplemental Security Income (SSI) standard; those born before were grandfathered out. The first stage is −10 percentage points (pp) SSI enrollment pooled (−39 pp conditional on unfavorable review). Removed youth recover only one-third of lost SSI income in earnings (+ $825/year vs. −$ 2,170/year SSI loss), sustain a $21,000 present-discounted-value (PDV) income decline over 16 years, and experience a quadrupling of income volatility — with no improvement in education, incarceration, marriage, or next-generation SSI receipt. The marginal value of public funds (MVPF) for SSI is 0.90–1.03, exceeding the Earned Income Tax Credit (EITC), food stamps, and housing vouchers.

Key Claims

RD design: PRWORA 1996 birthdate cutoff (August 22 = 18th birthday threshold); post-cutoff children subject to mandatory age-18 medical review under adult standard; pre-cutoff children grandfathered — no review possible.
Sample: 81,800 SSI children within ±37 weeks of the cutoff; 63% male; 73% mental/intellectual conditions; average parental earnings $9,600 (child aged 0–18); extremely poor baseline.
First stage: −10 pp SSI enrollment (pooled 16 cohorts, 1996–2011); unfavorable review = +39 pp removal probability.
Earnings response: + $825/year; SSI benefit loss: −$ 2,170/year → net observed income − $1,570/year; PDV over 16-year follow-up = **−$ 21,000 (−19%)** relative to control mean.
Off-SSI trajectory: Youth who remain off SSI earn only $4,400/year at age 30; PDV loss **−$ 76,000**. Control group ( $6,300) still far below denied SSI applicants ($ 14,000) and National Longitudinal Survey of Youth 1997 (NLSY97) Aid to Families with Dependent Children (AFDC) youth ($17,800).
Income volatility: Coefficient of variation quadruples (0.682 → 1.010); the average removed youth lands at the 90th percentile of the control group's volatility distribution.
No parental offset: Parents do not increase earnings or unearned income after child's SSI removal — contrast with Deshpande (2016a, Review of Economics and Statistics [REStat]), where parents fully offset child SSI loss at the intensive margin. Household PDV falls $16,400.
Sibling spillover: Siblings lose −$580/year in earnings (statistically significant); mechanism unclear — could be income channel or expectation-updating about disability program generosity.
No human capital channel: No significant effects on educational attainment, incarceration, marriage, or SSI receipt by the next generation — SSI does not create a poverty trap through reduced investment.
MVPF: Risk-neutral: 0.90; risk-averse ( $\gamma=2$ ): 1.03 (stable SSI worth $1.15 vs.$ 1.00 in volatile earnings). Exceeds EITC (0.88), food stamps (0.53–0.66), and housing vouchers (0.79) in Hendren (2016) framework.
Welfare loss decomposition: For $\gamma=2$ , 8–23% of welfare loss attributable to increased consumption volatility (not level drop), depending on assumed consumption floor.

Concepts Introduced or Extended

Entities Mentioned

Quotes

"Removed SSI youth recover only about one-third of the lost SSI income in earnings." (p. 3301)

"The very limited earnings response suggests that the earnings capacity of most SSI youth is quite low, and that disability — either directly through health, or indirectly through societal expectations and incentives — plays an important role in the low earnings levels of removed SSI youth." (p. 3354)

"The MVPF of SSI is higher than those that Hendren (2016) calculates for other safety net programs, including EITC (0.88), food stamps (0.53 to 0.66), and housing vouchers (0.79). Intuitively, SSI has a high MVPF because it produces very little crowd out in earnings given the low potential earnings of SSI youth." (p. 3328)

My Take

This is the definitive evidence that the age-18 SSI review imposes large, persistent income losses with minimal labor supply response — the population simply lacks the earnings capacity to substitute. The absence of a parental offset (contrast with 2016a REStat) means the income drop extends to the household level. The MVPF analysis is compelling but relies on Hendren's framework, which prices SSI favorably because the fiscal externality (earnings crowd-out) is small by construction when baseline earnings are near zero. The intergenerational null result is notable: unlike the Norwegian disability insurance (DI) setting (Dahl, Kostol, Mogstad 2014), there is no detectable causal transmission of disability receipt to the next generation among this U.S. SSI cohort.