Responses to Social Security by Men and Women: Myopic and Far-Sighted Behavior

Abstract

The labor supply response to critical aspects of the Social Security program depends on whether behavior is myopic (conditioned by current benefits only) or far-sighted (conditioned by the entire future benefit stream). This behavior reflects attitudes toward risk and ability to borrow, as well as underlying time preferences. The individual's effective time horizon is treated as an empirical question in this paper. Responses to the Social Security earnings test and the delayed retirement credit are examined, as well as the question of whether older men and women are able to work while keeping their earnings below the exempt earnings limit, in other words, whether the earnings test affects participation as well as hours of work. Hazard functions for labor market reentry after retirement are estimated using the Longitudinal Retirement History Study. We find striking gender differences, in that women respond to Social Security wealth and are not deterred from working by the earnings test, while men respond to current benefits and their labor force participation is impeded by the test. Increases in the delayed retirement credit, as provided by the 1983 amendments to the Social Security Act, should therefore increase the labor supply of older women but not of men, though its intention was to increase the supply of both; however, increasing or abolishing the earnings limit, as proposed in Congress, would increase older men's participation but not that of older women.