Pension Reform Disabled*

This paper builds a quantitative life‐cycle model with endogenous retirement to study how disability insurance (DI) and old‐age pension programs interact with health and wages to determine retirement age. Individuals face uncertain future health and wages, and if in bad health, they can retire with DI before reaching the statutory retirement age. I use the model to evaluate the macroeconomic impact of pension reforms. The main contribution is that, in contrast to standard macro pension models, my model includes DI as another endogenous retirement margin. I show that it is crucial to account for program substitution when evaluating welfare reforms.