Earnings Test Research Articles

Social Security and Retirement Dynamics

This paper is based on a structural model of retirement and saving, estimated with data for a sample of married men in the Health and Retirement Study. It explains the relation of specific features of Social Security - the benefit amount, the early entitlement age, the normal retirement age, earnings test parameters, and the delayed retirement credit - to the full range of retirement outcomes - continued work on the main job, full time work outside the main job after a period of partial or full retirement, as well as partial retirement and full retirement. The project also estimates the relation of Social Security to the flows among these states. We consider not only the effect of Social Security on movement from states of greater to lesser work, the probability of either moving from full time work to partial retirement or directly to full retirement, or from partial retirement to full retirement, but the reverse flows from states of lesser work to states of greater work. The largest effects of the policies examined are from increasing the early entitlement age from 62 to 64 and reducing benefits to 75 percent of their promised levels, the approximate amount benefits would have to be reduced when the trust fund runs out if there are no changes in funding. With the older early entitlement age, about 5 percent more of the population continues to work full time at their main job at 62 and 63 than would otherwise. In addition, another 4.5 percent of the male population works full time after having retired, as does another 4 percent at age 63. Partial retirement is reduced at ages 62 and 63 by about 3 percentage points when the early entitlement age is 64. Overall, complete retirements are about 6 percentage points lower at 62 and 63 when the early retirement age is higher. From age 64 on, the percent completely retired is about two percentage points lower in each year when the early entitlement age is 64 rather than 62. The effects of reducing promised Social Security benefits by about a quarter are also large. The probability of remaining on the main job is higher for those in their sixties, with the difference ranging from 3 to 5 percentage points for those ages 62 and older. At each year of age, an additional 1 percentage point will be in full time work after having retired. There is little difference in the fraction partially retired, so the probability of being fully retired is reduced by 4 to 6 percentage points when benefits are reduced by a quarter.

How to Evaluate the Effects of Social Security Policies on Retirement and Saving When Firm Policies Affect the Opportunities Facing Older Individuals

This project uses data from the Health and Retirement Study to examine, in the context of a structural retirement model, the effects on retirement of non-wage aspects of employment emanating from firm side factors. Factors examined include minimum hours constraints, layoffs, physical and mental requirements of the job, informal pressures to retire, accommodations made by the employer when a person has a health problem, and retirement windows. The most important effects found pertain to minimum hours constraints. Should minimum hours constraints be abolished, the percent of the population ages 62 to 69 who are completely retired will decline by 10 to 15 percentage points. The fraction in this age group who are working in partial retirement jobs will increase by roughly twenty percentage points of the population. Were minimum hours constraints abolished, more than twice as many people would enter partial retirement as would leave full time work. As a result, total FTE employment would increase were minimum hours constraints eliminated. Increasing the importance of partial retirement would affect the role of the earnings test and liquidity of the Social Security system, although the increase in partial retirement would be largely, but not entirely offset by the decline in full time work. This would limit the size of any effects on Social Security finances.

The Effect of the Social Security Earnings Test on Male Labor Supply

The Effect of the Social Security Earnings Test on Male Labor Supply

Projecting Behavioral Responses to the Next Generation of Retirement Policies

This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.

The Effect of the Social Security Earnings Test on Male Labor Supply: New Evidence from Survey and Administrative Data

Despite numerous empirical studies, there is surprisingly little agreement about whether the Social Security earnings test affects male labor supply. In this paper, we provide a comprehensive analysis of the labor supply effects of the earnings test using longitudinal administrative earnings data and more commonly used survey data. We find that the response to the earnings test in survey data is obfuscated by measurement error and labor market rigidities. Accounting for these factors, our results suggest a consistent and substantial response to the earnings test, especially for younger men.

The social security earnings test and work incentives

AbstractThe labor supply and benefit claiming incentives provided by the early retirement rules of the Social Security Old Age benefits program are of growing importance as the Normal Retirement Age (NRA) increases to 67, the labor force participation of Older Americans rises, and a variety of reforms to the Social Security system are considered. Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor, which are likely to be widely misunderstood due to the relatively little attention paid by policymakers and researchers to the fact that Americans are willing to work while receiving benefits. We describe these incentives and emphasize that individuals who claim benefits before the NRA but continue to work, or return to the labor force, can reduce the early retirement penalty by suspending the collection of monthly benefits if they earn above the Earnings Test limit. We then argue that the Earnings Test can be distortionary and is costly to administer, and that these characteristics are inflated by the lack of information given to Older Americans regarding the consequences of working while receiving retirement benefits. We present results from statistical models of labor force exit behavior using data from the Health and Retirement Study showing the relevance of these incentives, and investigate the importance of informational asymmetries among beneficiaries regarding benefit withholding using a dynamic life‐cycle model of labor supply and benefit claiming. We then use the latter framework to compare the behavioral and welfare implications of a removal of the Earnings Test to the policy of providing more information regarding the Earnings Test and the adjustment of the rate of benefit pay to Older Americans. © 2007 by the Association for Public Policy Analysis and Management

The Repeal of the Retirement Earnings Test and the Labor Supply of Older Men

This paper examines the impact of the Senior Citizens Freedom to Work Act of 2000, which abolished the Social Security retirement earnings test for those aged 65-69, on the labor supply of older men using data from the 1996-2004 waves of the Health and Retirement Study (HRS). Based on reduced-form specifications, we find that the repeal of the earnings test increased labor supply on the intensive margin by 12-17%, the bulk of which was concentrated among men with a high-school degree, whose labor supply rose by 19-26%. We formulate a unique test for endogenous reporting of health status by examining how reported health changes with the repeal of the earnings test. We find some evidence of endogenous self-reported health status. In particular, older men were substantially less likely to have reported that health limits their ability to work after, relative to before the earnings test repeal, with the bulk of the effect concentrated among men with high-school degrees, who had the largest labor-supply response to the repeal.

Do the Elderly Respond to Taxes on Earnings? Evidence from the Social Security Retirement Earnings Test

The effective tax on earnings embodied in the Social Security retirement earnings test has been as high as 50 percent. Surprisingly, among the numerous empirical studies that have examined the earnings test, there is little agreement about whether the earnings test affects elderly labor supply at all. This paper examines new and reconsiders existing empirical evidence on the earnings test and conclude that, at least for men, the earnings test has a substantial impact on labor supply and claiming behavior.

How Did the Elimination of the Earnings Test Above the Normal Retirement Age Affect Retirement Expectations?

The authors look at the effect of the 2000 repeal of the earnings test above the normal retirement age on retirement expectations of workers in the Health and Retirement Study, aged 51 to 61 in 1992. For men, they find that those whose marginal wage rate increased when the earnings test was repealed, had the largest increase in the probability to work full-time past normal retirement age. They do not find significant evidence of effects of the repeal of the earnings test on the probability to work past age 62 or the expected claiming age. On the other hand, for those reaching the normal retirement age, deviations between the age at which Social Security benefits are actually claimed and the previously reported expected age are more negative in 2000 than in 1998. Since their calculations show that the tax introduced by the earnings test was small when accounting for actuarial benefit adjustments and differential mortality, their results suggest that although male workers form expectations in a way consistent with forward-looking behavior, they misperceive the complicated rules of the earnings test. Results for females suggest similar patterns but estimates are imprecise.

New evidence on earnings and benefit claims following changes in the retirement earnings test in 2000

This paper examines the labor force activity and timing of benefit claims of workers aged 65–69 in response to the removal of the retirement earnings test in 2000. We use the 1% sample of longitudinal Social Security administrative data that covers the period from 4 years before to 4 years after the removal of the test. Using a reduced-form quantile regression method, we find that effects on earnings are limited to workers with earnings just around the test threshold and above, as predicted by economic theory. Our estimated effects suggest that labor supply elasticities with respect to the net-of-tax rate are approximately 0.05–0.07 for working primary beneficiaries aged 65–69 whose earnings are between the median and the 80th percentile. Further, results show that applications for Social Security benefits following the earnings test removal accelerated by 2 to 5 percentage points among individuals aged 65–69 and by 3 to 7 percentage points among those reaching age 65.

Persistence in Labor Supply and the Response to the Social Security Earnings Test

This paper investigates the impact on labor supply of changes in the Social Security earnings test in 1996 and 2000. We highlight how the persistence of labor supply choices influences both responses to policy changes and the estimation of such responses. We do this in two ways. First, we use data from the Health and Retirement Study and the Current Population Survey that allows us to compare employment transitions across cohorts that are differentially affected by changes in the earnings test rules. We show that conditioning on last year’s employment status is important in identifying responses to current earnings test changes. Second, we test the effect of not only current but also anticipated as well as past earnings test parameters which cohorts faced at earlier ages. We find that past and anticipated future rules influence current employment and earnings. Our results help to identify an effect of earnings test changes affecting ages 65-69 on employment at younger and older ages, which suggests caution about the use of neighboring age groups as control groups in analyzing responses to the earnings test. We also show that earnings test changes that were initiated in 1996 had an important effect, in addition to the changes in 2000 that have been extensively studied.

The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour

This paper estimates a life cycle model of labour supply, retirement, and savings behaviour in which future health status and wages are uncertain. Individuals face a fixed cost of work and cannot borrow against future labour, pension, or Social Security income. The method of simulated moments is used to match the life cycle profiles of labour force participation, hours worked, and assets that are estimated from the data to those that are generated by the model. The model establishes that the tax structure of the Social Security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65. Removing the tax wedge embedded in the Social Security earnings test for individuals aged 65 and older would delay job exit by almost one year. By contrast, Social Security benefit levels, health, and borrowing constraints are less important determinants of job exit at older ages. For example, reducing Social Security benefits by 20% would cause workers to delay exit from the labour force by only three months.

The Social Security Retirement Earnings Test, Retirement and Benefit Claiming

This paper introduces the age at which Social Security benefits are claimed as an additional outcome in a structural model of retirement and wealth. The model is then used to simulate the effects of abolishing the remainder of the Social Security earnings test, between age 62 and the full retirement age. Estimates are based on data for married men from the first six waves of the Health and Retirement Study. From age 62 through the full retirement age, the earnings test reduces the share of married men who work full time by about four percentage points, which entails a reduction of about ten percent in the number of married men of that age at full time work. In terms of the cash flow of the system, abolishing the earnings test would have an adverse effect, at least initially. If the earnings test were abolished between the early and full retirement ages, the share of married men claiming Social Security benefits would increase by about 10 percentage points, and the average benefit payments would increase by about $1,800 per recipient. The initial increase in benefit payments would eventually be reversed, over a time span of decades, because the annual benefit amounts would eventually be reduced by more than an actuarially fair amount due to the earlier collection of benefits. One can increase the employment of older persons either by abolishing the earnings test or by increasing the early entitlement age under Social Security. A major difference on the funding side is that abolishing the earning test results in an earlier flow of benefit payments from Social Security, worsening the cash-flow problems of the system, while increasing the early entitlement age delays the flow of benefit payments from the system, improving its liquidity.

Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?

The Social Security earnings test, a version of which still applies to those ages 62-64, reduces immediate payments to beneficiaries whose labor income exceeds a given threshold. Although benefits are subsequently increased to compensate for any such reduction, the earnings test is typically perceived as a tax on working. As a result, it is considered by many to be an important disincentive to paid work for older Americans. Yet there is little evidence to suggest an economically significant effect of the earnings test on hours of work, and almost no research on the effect of the test on the decision to work at all. We investigate these issues using the significant changes in the structure of the earnings test over the past 25 years, using data over the past 25 years, using data over the 1973-1998 period from the March Supplement to the Current Population Survey (CPS), which provide large samples of observations on the elderly. Our analysis suggests two major conclusions. First, the earnings test exerts no robust influence on the labor supply decisions of men. Neither graphical analyses of breaks in labor supply trends, nor regression estimates that control for underlying trends in labor supply by age group, reveal any significant impact of changes in earnings test parameters on aggregate employment, hours of work, or earnings for men. For women, there is more suggestive evidence that the earnings test is affecting labor supply decisions. Second, loosening the earnings test appears to accelerate benefits receipt among the eligible population, lowering benefits levels, and heightening concerns about the standard of living of these elderly at very advanced ages. Our findings suggest some cause for caution before rushing to remove the earnings test at younger ages.

How Important are Wages to the Elderly? Evidence from the New Beneficiary Data System and the Social Security Earnings Test

More than 40 percent of Social Security beneficiaries continue to work after age 65. This research investigates the extent to which these individuals substitute labor across periods in response to anticipated wage changes induced by the Social Security earnings test. While we find that a disproportionate number of individuals choose earnings within a few percentage points of the earnings limit, we find no evidence that these individuals substitute labor supply between ages 69 and 70 when, in our sample, the tax on earnings falls from 50 percent to zero.

Evaluating the Effects of the Removal of the Retirement Earnings Test in 2000

This paper examines reactions in the labor force activity of workers aged 65-69 in response to the 2000 removal of the retirement earnings test (RET), using Social Security administrative data matched with Survey of Income and Program Participation (SIPP) data. This paper used a percentile-based difference-in-differences model to capture uneven impacts across the earnings distribution. Results indicate that after the RET removal, earnings of those in the higher percentiles of the earnings distribution increased, while earnings of those in the lower percentiles did not. There is no clear evidence that the RET removal increased the labor force participation (employment) rate, but acceleration of benefits applications among older workers was evident.

Crowding Out: Estate Tax Reform and the Elder Law Policy Agenda

This article examines the estate tax reform provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 in the context of important issues affecting older Americans. Contrary to policymakers' claims that the estate tax is a major concern for elders, this article shows that only a tiny minority of decedents have any estate tax exposure, and that the recently increased exemption will reduce this group even further. In any case, the estate tax is an issue for nonspouse survivors of an elderly decedent, rather than the elders themselves. Even more significantly, by focusing on estate tax reform, policymakers have ignored numerous issues that are truly more important to older Americans, including prescription drugs, long-term care financing, advance health-care directives, Social Security's earnings test, and undiversified pension plans. After examining each of these issues, the article concludes by suggesting that more attention be paid to issues that affect the medical and financial quality of most elders' lives, rather than the pecuniary interests of a few elders' nonspousal survivors.

US Social Security rules in the 1990s: a natural experiment in myopic and farsighted behaviour

During the 1990s changes in the earnings test threshold and the delayed retirement credit had the potential to impact the labour supply of 65 to 69-year-olds. These changes in Social Security rules are used to examine whether labour supply behaviour of elderly men and women is ‘myopic’ or ‘farsighted’. Men are found to be more farsighted than previously realized, perhaps due to increases in life expectancy.

Social Security and Democracy

Many political economic theories use and emphasize the process of voting in their explanation of the growth of Social Security, government spending, and other public policies. But is there an empirical connection between democracy and Social Security program size or design? Using some new international data sets to produce both country-panel econometric estimates as well as case studies of South American and southern European countries, we find that Social Security policy varies according to economic and demographic factors, but that very different political histories can result in the same Social Security policy. We find little partial effect of democracy on the size of Social Security budgets, on how those budgets are allocated, or how economic and demographic factors affect Social Security. If there is any observed difference, democracies spend a little less of their GDP on Social Security, grow their budgets a bit more slowly, and cap their payroll tax more often, than do economically and demographically similar nondemocracies. Democracies and nondemocracies are equally likely to have benefit formulas inducing retirement and, conditional on GDP per capita, equally likely to induce retirement with a retirement test vs. an earnings test.

The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom

High effective tax rates on work at and around state pension age deter participation. An example is the `earnings test' operating in several OECD countries. The United States abolished its test for the 65+ age group in 2000. The United Kingdom offers a `natural experiment' of this reform, as it abolished its test, known as the `earnings rule', in 1989. We examine the effect of this change, taking account of the opportunity to defer pension rights. Abolition of the rule raised working hours of older male workers by around 4 hours a week, with a lesser impact on women's behaviour.