A perverse incentive refers to an incentive that yields an unintended and undesirable outcome which is contrary to the initial interests of the incentive makers. Generally, there are different scenarios in which perverse incentives can result, and the disability retirement payouts are a perfect example. When people can no longer perform their daily work efficiently and effectively because of an injury, cognitive condition, or illness that is likely to recur for the rest of their lives, they may become eligible to retire on disability.
Disability retirement may be work-related or non-work related. A work-related disability occurs as a result of an occupational injury or illness that happens on the job and the cause is established to be compensable under some certain legislation depending on the organization. Non-work disability, on the other hand, may occur as a result of a non-occupational illness, cognitive condition, or an injury; for example, mental illness, an accident while out of the workplace, and chronic condition such as cancer, which worsens to an extent that the employee can no longer deliver at work. Generally, disability payment is very generous as compared to the regular pension payouts that are offered to other employees at retirement. The disability retirement benefits exceed even regular retirement benefits for an employee that has been most dedicated at work. Because of this attractiveness of the disability retirement payout, many people may want to use it in the wrong way as a perverse incentive.
A person must fulfill certain conditions before being admitted into disability retirement. These conditions vary depending on the type and nature of the entity that the person is working for. Because of the attractiveness of this disability retirement payout, employees’ behavior at the workplace can be negatively affected whereby many of them would want to retire on disability, rather than on regular retirement terms. Fo...