The Anticipation Effect of the Earnings Test Reform on Younger Cohorts

Abstract

The Social Security earnings test reform in 2000 eliminated the earnings test for all individuals between the normal retirement age (NRA) and age sixty-nine. The earnings test has long been accused of imposing a disincentive on the labor supply among older workers. In this article, we argue that the policy change may also have affected the labor supply among people who were just below the NRA around 2000. We utilize approaches embedded with a difference-in-differences design to estimate the anticipation effect on the labor supply of the slightly younger group (aged sixty-two to sixty-four) using an even younger cohort as the control group. Our preferred estimates indicate that the cohort aged sixty-two to sixty-four had worked 5.4 percent more weeks per year and 5.1 percent more hours per week after the earnings test reform in 2000.