The social security earnings test and work incentives

Abstract

The 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

Social Security, Benefit Claiming, and Labor Force Participation: A Quantitative General Equilibrium Approach

“…For example, a $1 rise in the benefit starting at the normal retirement age of 66 would correspond to the rise of the benefit entitlement at age 63 by 80 cents, given the ARF for the age 63 retirement is 80%. See Benitez-Sílva and Heiland (2007a) and Benitez-Sílva and Heiland (2007b) …”

Social Security Literacy and Retirement Well-Being

“…This benchmark model is closely related to the ones presented in Benítez-Silva and Heiland (2007), and Benítez-Silva et al (2009), and does a good job at matching some of the most elusive evidence regarding individual behavior at older ages. As mentioned before this model improves upon those mentioned by also modeling employment uncertainty and unemployment insurance, and does an excellent job at matching the evidence on the claiming behavior in the United States.…”

“…Calculation of benefits and the reduction factors are as explained in Benítez-Silva and Heiland (2007), assuming an NRA of 66. In particular, the number of checks received in a year depends on the earnings after claiming: The number of checks (or the benefit amount on some checks received towards the end of the period) are reduced, reflecting the 50% rate on labor incomes exceeding the Earnings Test limit between 62 and the January of the year a person turns 66 (33% thereafter).…”

Social Security and elderly labor supply: Evidence from the Health and Retirement Study

“…On a policy level, the enactment of laws against age discrimination and the abolition of mandatory retirement have also encouraged the employment of older workers (Neumark and Stock, 1999). Moreover, the implicit tax imposed by the Social Security earnings test, which discourages recipients of retirement benefits from earning labor income, was progressively reduced and ultimately eliminated for beneficiaries at or above the normal retirement age (Gruber and Orszag, 2003;Benitez-Silva and Heiland, 2007;Haider and Loughran, 2008;Engelhardt and Kumar, 2009 …”