Harsh occupations, health status and social security

We study the optimal design of a social security system when individuals differ in health status and occupation. Health status is private information but is imperfectly correlated with occupation: individuals in harsh occupations are more likely to be in poor health. We explore the desirability of letting the social security policy differ by occupation and compare the results with those obtained when disability tests are used instead. We show that tagging by occupation is preferable to testing when the audit technology is relatively expensive and/or the proportion of disabled workers differs markedly across occupations. Expected utility differences between occupations could induce workers to switch occupations if they were able to. We explore the implications of imposing equality of expected utility across occupations. © 2015, Springer-Verlag Wien.