Abstract This paper introduces a multi‐stage Overlapping Generations (OLG) model of workers and retirees, segmented by disability status and eligibility for Disability Pension (DP) benefits. Extending Gertler (1999) with progressive disability stages of distinct productivity and transition probabilities, and calibrated to US data, the model generates DP benefits of 6.78% of GDP in the base case. Sensitivity analyses on replacement ratios, survival, labor‐force growth, and differential mortality confirm robustness. We evaluate four reforms: Disability Assistance, employment incentives, benefit reduction, and tighter screening. Benefit reduction and screening are near‐substitutes at the macroeconomic level but differ sharply in distributional consequences, while a decomposition of aggregate and per‐capita effects shows that the large changes induced by employment incentives are mainly compositional. A two‐state benchmark confirms that the multi‐stage structure is necessary to capture these distinctions, underscoring the need to balance fiscal sustainability with protection of vulnerable groups.
Lee et al. (Wed,) studied this question.