The Effect of Old Age Assistance on Retirement

Abstract

This paper analyzes the impact of the first means-tested transfer program for the elderly on retirement behavior. In the literature on retirement a great deal of attention has been devoted to analyzing the role of Social Security since the 1960s, with mixed findings. However, Old Age Assistance (OAA), a means-tested program established in 1935, dwarfed Social Security until the 1950s and coincided with the early decline in elderly participation. In addition, OAA benefit levels were determined by the states--a key source of policy variation that is missing in the case of Social Security. I estimate the relationship between OAA benefit levels and elderly labor force participation using individual data from the 1940 and 1950 Censuses. The effect of OAA is found to be quite strong: the estimates imply that participation would barely have declined at all if benefits had not been raised during the 1940s. The estimates naturally suggest a large decline in participation due to rising generosity of Social Security in the following decade. I also offer evidence against the possible endogeneity of state benefit levels.