How Social Security’s Earning Test, Age and Education Affect Female Labor Supply

Abstract

This paper investigates the impact of a major Social Security policy change on the labor force participation rates of elderly females, both married and single, and of various races and ethnicities. Historically, social security benefits were reduced if labor income exceeded a certain level. The employment tax ranged from a $1 reduction for each $1 earned to a $1 reduction for each $3 earned. Prior to 2000, the age at which this reduction was no longer applied, varied between 70 and 75. However, in 2000 the age was lowered to what the Social Security Administration calls the normal retirement age which ranges between 65 and 67 depending on the date the person was born. Such a major change provided fertile ground for economic research. Studies have proliferated on the impact of the regime change on the labor force participation rates of elderly males. However, little work has been conducted regarding the impact of this policy change on female labor force participation rates. This study shows that after the employment tax was eliminated for those reaching their normal retirement age, the labor-force participation rates of single, divorced, separated and widowed women in the targeted age range usually increased. The estimates indicate the labor-force participation rates of married women in the affected age range fell with the elimination of the employment tax.