Earnings Test Research Articles

Improving understanding of the retirement earnings test

AbstractThis paper presents results from an online experiment that tested the effect of simple, concise information on respondents' knowledge of the rules of Social Security's Retirement Earnings Test (RET). We find that a straightforward, simple information treatment has a large effect on knowledge of the RET and on prospective choices regarding working and claiming benefits. We tested two additional information treatments that provided more comprehensive information and used illustrative examples. One of the additional treatments used only text, while the other one included a visual tool. Our results suggest that the additional treatments did not further improve knowledge; the simplest intervention yielded the same effect as the more comprehensive ones.

Pension plan heterogeneity and retirement behavior

This paper examines the role of Social Security policy changes and the shift in pension plans — from annuity based retirement plans like Defined Benefit to account based plans like Defined Contribution — in explaining the recent increase in labor force participation of older workers. A structural retirement model of consumption, savings, Social Security, health insurance and pension plan heterogeneity is estimated using data from the Health and Retirement Study. The model captures key differences in pension wealth evolution across Defined Benefit and Defined Contribution pension plans and accounts for differences in out-of pocket medical spending across different health insurance groups. As a result, it produces variation in labor supply, both across different pension plan groups and health insurance types at older ages, as observed in the data. After controlling for any changes in the population age distribution and health insurance plans over time, model simulations indicate that changes in pension plan composition can explain 30.5 percent of the increase in labor force participation of the age group 65 to 69. Changes in Social Security normal retirement age and earnings test can each explain 19 and 45% of the increase in labor supply respectively for this age group.

Pension reform and return-to-work policies

AbstractFor many people, working after beginning retirement benefit collection is a way to enhance financial security by increasing income. Existing research has shown that retirees are sensitive to the Social Security earnings test, which restricts the amount of earnings some beneficiaries can receive. However, little is known about the effects of other types of policies on post-retirement employment. Instead of restricting earnings, many public pension plans restrict the number of hours beneficiaries can work. I use return-to-work rules limiting the number of hours of employment in a state's public pension plan and administrative data on employment and retirement to determine the rules’ effects on retirement decisions and post-retirement labor supply. I find that the increases in the maximum number of hours of post-retirement employment lead to no change in retirement benefit collection and to increases in part-time work among retirees. As such, these policies appear to be binding on the labor supply decisions of some employees. These results are relevant for designing policies aimed at extending work-lives or improving the health of pension systems.

The Minimum Wage and Incentives for Full-Time Work Under the Social Security Retirement Earnings Test

This paper examined how the earnings test affects the hours and employment of men who claim early benefits. It uses 1982-2016 data from the Current Population Survey and 1992-2014 data from the Health and Retirement Study. Critical components of the analysis include the idea that for any fixed earnings-test threshold amount, an increase in the hourly wage at which a beneficiary can work reduces the number of hours needed annually to hit the threshold. This feature of the test and substantial state-by-calendar year variation from increases in the minimum wage, which lower the threshold level of hours at which the earnings test binds, are used to identify the impact of the test on labor supply on the intensive and extensive margins for men who claim early.

Earnings test, non-actuarial adjustments and flexible retirement

In response to the challenges of increasing longevity, many countries have introduced “flexibility reforms” for their public pension systems. A key measure of these reforms is the abolishment of earnings tests. It is claimed that these reforms increase labor supply and therefore the financial sustainability of pension systems. We build a simulation model to show that abolishing an earnings test may indeed create more labor supply but simultaneously reduce the average claiming age when adjustments remain less than actuarial, as is the case in most European pension systems. Flexibility reforms may therefore worsen rather than improve the sustainability of public pension systems.

Does retirement improve health and life satisfaction?

We utilize panel data from the Health and Retirement Study to investigate the impact of retirement on physical and mental health, life satisfaction, and health care utilization. Because poor health can induce retirement, we instrument for retirement using eligibility for Social Security and employer-sponsored pensions and coverage by the Social Security earnings test. We find strong evidence that retirement improves reported health, mental health, and life satisfaction. In addition, we find evidence of improvements in functional limitations in the long run. Although the impact on life satisfaction occurs within the first 4years of retirement, many of the improvements in health show up four or more years later, consistent with the view that health is a stock that evolves slowly. We find no evidence that the health improvements are driven by increased health care utilization. In fact, results suggest decreased utilization in some categories.

Inequality in the labor market: lower perceived returns among marginalized youths and girls

Purpose This paper examines perceived labor market earnings among adolescents and their parents by gender and caste. Previous research has established that lower subjective expectations of labor market returns among parents affect educational investment. Likewise, subjective expectations of adolescents about labor market returns are likely to affect their commitment to their education. In the labor market, gender and caste biases manifest itself in terms of lower wages for women and persons from marginalized communities. The authors ask if perceived earnings among adolescents and their parents vary by caste and gender over and above their intrinsic ability. Design/methodology/approach The authors use a unique dataset on adolescents that has been recently collected (2013-2015) by ASER Centre, the research and assessment wing of Pratham Education Foundation for the analysis. To answer the research question posed in the paper, they use standard OLS and quantile regression techniques. Findings Results confirm that girls have lower expected earnings than boys. Caste differences appear more rigid in Bihar. Research limitations/implications The authors recognize that the results presented do not take into consideration the issue of selection bias. Hence, they are applicable not to the average adolescents in the study districts, but only to those who reported expected earnings. That said, they do not think that this technical limitation dilutes the broad policy conclusions emerging from the study. Originality/value The paper uses cognition as a measure of an adolescent’s intrinsic ability. Therein lays the uniqueness of the paper. It brings into the discussion on expected earnings test scores as a measure of an adolescent’s cognitive ability. It is also unique in that it focuses on adolescents in the age group of 11-16 years who are likely to join the labor force in few years. Previous discussion of subjective expectations in India did not include any measure to capture cognitive ability and did not focus exclusively on adolescents.

Earnings Adjustment Frictions: Evidence from Social Security Earnings Test

The AET is an appealing context for studying earnings adjustment for at least three reasons. First, bunching at the AET kink is easily visible on a graph, allowing credible documentation of behavioral responses. Second, the AET represents one of the few known kinks at which bunching occurs in the U.S.; indeed, our paper represents the first study to find robust evidence of bunching among the nonself-employed at any kink in the U.S. Third, the AET is important to policy-makers in its own right, as it is a significant factor that affects the earnings of the elderly in the U.S. The study is based on a panel of Social Security Administration microdata on 1 percent of the U.S. population from 1961 to 2006. We make three main contributions to understanding adjustment frictions. First, we document that earnings adjustment frictions exist in the U.S., by showing that in some contexts individuals do not adjust immediately to changes in AET. We focus particularly on cases in which a kink in the effective tax schedule disappears, either because individuals reach an age at which they are no longer subject to the ET, or because legislative changes remove the AET for some groups. We focus on the disappearance of kinks because in the absence of adjustment frictions, removal of a convex kink in the effective tax schedule should immediately lead to no bunching at the earnings level associated with the former kink; thus, any observed delay in reaching zero bunching should reflect adjustment frictions. We observe clear evidence of delays in some contexts, consistent with adjustment frictions. Nonetheless, across several contexts – including both anticipated and unanticipated changes in policy – the vast majority of individuals’ adjustment occurs within at most three years. Adjustment appears even faster in certain contexts. Second, we assess the mechanisms that underlie the patterns of adjustment we observe, in order to build a model consistent with these descriptive patterns. We assess the extent to which employers play a role in coordinating individual responses to the AET by offering jobs with earnings at the AET exempt amount. In our main period of study, we find little evidence that individuals not subject to the AET – those too young to claim benefits – bunch at the kink, suggesting that the primary responses to the AET are mediated by employees’ choices. We also find evidence that the individuals who respond to the

Do People Get the Information They Need When They Claim Social Security? Evidence from Observations of the Social Security Administration Claims Process

Many individuals claim Social Security retirement benefits as soon as they are eligible for them, even though these individuals would receive higher benefits if they delayed. This study examines (1) the extent to which people understand Social Security rules affecting their retirement benefits, and (2) what information the Social Security Administration (SSA) provides to individuals to enable them to make informed claiming decisions. The authors observed 30 in-person claims at SSA field offices and found that claimants were not consistently provided the information needed to make well-informed decisions. For example, in 8 of 26 claims interviews in which the claimant could have received higher benefits by delaying a claim, the claims specialist did not discuss the advantages and disadvantages of delay. Further, only 7 of the 18 claimants for whom the retirement earnings test could potentially apply were given complete information about how the test worked. The problems the authors observed during the claims interviews occurred in part because the questions included in the claims process did not cover some key information.

Salience and Social Security Benefits

We study the effect of salience in the social security benefit system on labor earnings by exploiting kinks and notches in budget lines introduced by earnings testing and social security accrual mechanisms for 67- to 69-year-old workers in Norway. An earnings test had large effects on labor earnings, while an accrual system discontinuity had no discernible effects. We interpret the difference as likely to be caused by a lack of salience in the accrual incentives: agents are not able or willing to take into account the value of future benefit increases when considering the relevant rewards for working.

Using Kinked Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Social Security Earnings Test

We develop a method for estimating the effect of a kinked budget set on workers' employment decisions, and we use it to estimate the impact of the Social Security Old-Age and Survivors Insurance (OASI) Annual Earnings Test (AET). The AET reduces OASI claimants' current OASI benefits in proportion to their earnings in excess of an exempt amount. Using a Regression Kink Design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the employment rate. We develop conditions in a general setting under which we can use such patterns to estimate the elasticity of the employment rate with respect to the effective average net-of-tax rate. Our resulting elasticity point estimate for the AET is at least 0.49, suggesting that the AET reduces employment by more than one percentage point in the group we study.

Earnings Test, Non-Acturial Adjustments and Flexible Retirement

Updated Version: February 1, 2018 English Abstract: In response to the challenges of increasing longevity, an obvious policy response is to gradually increase the statutory eligibility age for public pension benefits and to shut down pathways to early retirement such as special rules for women. This is, however, very unpopular. As an alternative, many countries have introduced “flexibility reforms” which allow combining part-time work and partial retirement. A key measure of these reforms is the abolishment of earnings tests. It is claimed that these reforms increase labor supply and therefore, also the sustainability of pension systems. We show that these claims may not be true in the circumstances of most European countries. To this end, we employ a life-cycle model of consumption and labor supply where the choices of labor force exit and benefit claiming age are endogenous and potentially separate. Earnings tests force workers to exit the labor market when claiming a pension. After abolishing the earnings test, workers can claim their benefits and can keep on working, potentially increasing labor supply. Our key result is that the difference between exit and claiming age strongly depends on the actuarial neutrality of the pension system and can become very large. Abolishing an earnings test as part of a “flexibility reform” may therefore create more labor supply but at the same time, reduce the average claiming age when adjustments remain less than actuarial, thereby worsening rather than improving the sustainability of public pension systems. German Abstract: Als Reaktion auf die Herausforderungen einer steigenden Lebenserwartung ist es eine bekannte Politikmasnahme, das gesetzliche Renteneintrittsalter schrittweise anzuheben und Pfade in die Fruhrente, wie besondere Regelungen fur Frauen, zu schliesen. Dies ist jedoch sehr unpopular. Als Alternative haben viele Lander „Flexibilitatsreformen“ eingefuhrt, die es erlauben Erwerbs- und Renteneinkommen zu kombinieren. Eine Schlusselmasnahme dieser Reformen ist die Abschaffung von Hinzuverdienstgrenzen. Es wird oft behauptet, dass diese Reformen das Arbeitsangebot erhohen und so auch die Nachhaltigkeit von offentlichen Rentensystemen starken. Wir zeigen, dass diese Aussagen fur die meisten europaischen Lander oft nicht wahr sind. Zu diesem Zweck verwenden wir ein Lebenszyklusmodell, das Konsum und Arbeitsangebot beschreibt und bei dem die Entscheidungen uber das Alter, zu dem man aus dem Arbeitsmarkt ausscheiden mochte, und uber das Alter, zu dem man beginnen will, Rente zu beziehen, endogen und potentiell verschieden sind. Hinzuverdienstgrenzen zwingen die Arbeitnehmer den Arbeitsmarkt zu verlassen, sobald sie ihre Renten beziehen. Wenn diese Hinzuverdienstgrenzen aufgehoben sind, konnen Arbeitnehmer Renten beziehen und gleichzeitig arbeiten, was tendenziell das Arbeitsangebot erhohen sollte. Unser Hauptresultat ist, dass der Unterschied zwischen Arbeitsmarktaustrittsalter und Renteneintrittsalter stark von der Anreizneutralitat des Rentensystems abhangt und sehr gros werden kann. Die Abschaffung von Hinzuverdienstgrenzen als Teil einer „Flexibilitatsreform“ kann daher das Arbeitsangebot erhohen, aber zugleich auch das durchschnittliche Renteneintrittsalter verringern, wenn die Zu- und Abschlage niedriger als anreizkompatibel sind. In diesem Fall wurde die finanzielle Nachhaltigkeit der offentlichen Rentensysteme verschlechtert anstatt verbessert.

Is Uncle Sam Inducing the Elderly to Retire?

Executive SummaryMany, if not most, baby boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, boomers must look to their own devices to rescue their retirements, namely, working harder and longer. However, the incentive of boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is Medicaid and Social Security’s complex earnings test and clawback of disability benefits. This study measures the work disincentives confronting those age 50 to 79 from the entire array of explicit and implicit fiscal work disincentives. Specifically, the paper runs older respondents in the Federal Reserve’s 2013 Survey of Consumer Finances through The Fiscal Analyzer—a software tool designed, in part, to cal...

Does Eliminating the Earnings Test Increase the Incidence of Low Income Among Older Women?

Reducing or eliminating Social Security's retirement earnings test (RET) can encourage labor supply of older individuals receiving benefits. However, these reforms can encourage earlier claiming of Social Security benefits, permanently lowering future benefits. We explore the consequences, for older women, of eliminating the RET from the full retirement age to age 69 (in 2000), relying on the intercohort variation in exposure to changes in the RET to estimate these effects. The evidence is consistent with the conclusion that eliminating the RET increased the likelihood of having very low incomes among women in their mid-70s and older-ages at which the lower benefits from claiming earlier could outweigh higher income in the earlier period when women or their husbands increased their labor supply.

Social Security: Improvements to Claims Process Could Help People Make Better Informed Decisions about Retirement Benefits

Many eligible individuals claim Social Security retirement benefits at the earliest eligibility age, even though they would receive higher benefits if they waited until older ages. In order to make an informed decision about when to claim, people need to understand how various Social Security rules and other factors affect benefit amounts. Our review of nine surveys and academic studies, and interviews with retirement experts, suggest that many individuals do not fully understand key details of Social Security rules that can potentially affect their retirement benefits. For example, while some people understand that delaying claiming leads to higher monthly benefits, many are unclear about the actual amount that benefits increase with claiming age. The studies and surveys also found widespread misunderstanding about whether spousal benefits are available, how monthly benefits are determined, and how the retirement earnings test works. Understanding these rules and other information, such as life expectancy and longevity risk, could be central to people making well-informed decisions about when to claim benefits. Our observed 30 in-person claims at SSA field offices and found that claimants were not consistently provided key information that people may need to make well-informed decisions. For example, in 8 of 26 claims interviews in which the claimant could have received higher monthly benefits by waiting until a later age, the claims specialist did not discuss the advantages and disadvantages of delaying claiming. Further, only 7 of the 18 claimants for whom the retirement earnings test could potentially apply were given complete information about how the test worked. SSA's Program Operations Manual System (POMS) states that claims specialists should explain the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. The problems we observed during the claims interviews occurred in part because the questions included in the claims process did not specifically cover some key information.

Pension reform and labor supply

We exploit a comprehensive restructuring of the early retirement system in Norway in 2011 to examine labor supply responses to increases in work incentives and actuarially neutral reductions in the age of first access to pension benefits. We find that increasing the returns to work is a powerful policy: The removal of an earnings test, implying a doubling of the average net take-home wage, led to an increase in average labor supply by 7h per week (30%) at age 63 and by 8h (46%) at age 64. The responses primarily came at the extensive margin. In contrast, reducing the access age has almost no effect on labor supply, in our setting with actuarially fair work incentives.

Does Eliminating the Earnings Test Increase the Incidence of Low Income Among Older Women?

Does Eliminating the Earnings Test Increase the Incidence of Low Income Among Older Women?

Estimation of a Structural Labour Supply Model for Belgium: Application to the Earnings Test for Pension Recipients

In several OECD countries pension benefits are taxed away if retirees continue working and receive earnings that cross a threshold. Recently governments started to increase these earnings thresholds for working pensioners. On the basis of Belgian administrative data covering the years before and after such a reform, we show that bunching at a convex kink of the budget constraint tracks these tax rule changes. To account also for income effects along other parts of the piecewise-linear budget constraint, we estimate a structural labour supply model. A removal of the earnings test would lead to an increase of 2.44 hours worked per week but causes a budgetary deficit as well: pension benefits will be claimed earlier (as the deferral rate for pensions equals zero in Belgium) while social contribution revenues fall back. The intuition is that the income effect which leads high-earners to work less partly offsets the substitution effect which stimulates low-earner (previously at the convex kink) to work more.

Earnings Adjustment Frictions: Evidence from the Social Security Earnings Test

We study frictions in adjusting earnings to changes in the Social Security Annual Earnings Test (AET) using a panel of Social Security Administration microdata on one percent of the U.S. population from 1961 to 2006. Individuals continue to bunch at the convex kink the AET creates even when they are no longer subject to the AET, consistent with the existence of earnings adjustment frictions in the U.S. We develop a novel framework for estimating an earnings elasticity and an adjustment cost using information on the amount of bunching at kinks before and after policy changes in earnings incentives around the kinks. We apply this method in settings in which individuals face changes in the AET bene.t reduction rate, and we estimate in a baseline case that the earnings elasticity with respect to the implicit net-of-tax share is 0.23, and the .xed cost of adjustment is $152.08.

THE EFFECTS OF THE TAXATION OF SOCIAL SECURITY BENEFITS ON OLDER WORKERS' INCOME AND CLAIMING DECISIONS

Social Security benefits are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage the labor supply of older workers and affect the decision to claim benefits. Using a nonparametric graphical methodology, this paper investigates whether older taxpayers reduce income to avoid the tax. While previous research found that the labor supply of older workers is significantly affected by the Social Security earnings test, we find little evidence of a response to benefit taxation in a large panel of data compiled from individual income tax and information returns. Similarly, while taxation of benefits provides an incentive for many to delay claiming, we find no evidence of such an effect. Overall, the findings suggest that older taxpayers have little understanding of the rules governing Social Security benefit taxation.