The decentralization of social assistance and the rise of disability insurance enrolment

Fiscal decentralization, the decentralization of government expenditures to local governments, may enhance public sector efficiency. Vertical externalities, i.e. spillovers between local and central government, could however undo part of this advantage. In this paper we estimate spillovers from Social Assistance (SA), administered by municipalities, towards central government’s Social Security Disability Insurance (SSDI) scheme in The Netherlands. The latter scheme saw rapidly rising enrolment rates after financial responsibility for Social Assistance was transferred from central to local government. We find that the correlation between local SSDI enrolment and the local stock of SA benefits recipients has increased significantly in the years after decentralization. We show that an increased caseload shifting from Social Assistance to Disability Insurance is the only plausible explanation for this change. Our analysis shows that, following the decentralization of Social Assistance, at least one third of the SSDI inflow was diverted from SA. This caseload shifting increased more rapidly in municipalities experiencing deficits on their SA budgets than in municipalities running a surplus.