A key question is whether the current scheme, and particularly the exempt income amount, is well designed. On one hand, the scheme should encourage employment among individuals on disability insurance. On the other hand, it should ensure that working is more advantageous compared to combining work and benefits.
Our main conclusion is that the current scheme and the current exempt income limit probably strikes a satisfactory balance between these considerations. We use a microsimulation model to estimate effects of changing the benefit reduction rules based on findings from the research literature. The exempt income limit appears important in promoting labor force participation among fully disabled individuals. Our calculations suggest that only about 8 percent of fully disabled individuals would have participated in the labor force if the exempt income limit was terminated, compared to about 22 percent today. However, a higher exempt income limit than the current level would not increase labor force participation significantly. A higher exempt income limit would also make full disability benefits more advantageous compared to partial disability benefits, as it would be more beneficial to combine full disability benefits with part-time work. Generally, it would become more beneficial to be granted a higher disability rating than what the actual ability to work would suggest.
An important aspect of combining work and disability benefits is how work affects disposable income. Supplementary benefits such as child supplements, disability pensions from public occupational pensions, and housing allowances are also tested against income. The regulations are complex, and understanding how a reduction in one benefit affects another is often challenging. It will still pay to work for most people, but simultaneous reductions in multiple benefits may result in very low incentives to work. This is particularly relevant for child allowances, which affects many individuals on disability insurance. A few adjustments to the current regulations can help reduce instances where work incentives are very low.