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The social security earnings test and work incentives

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  • Hugo Ben�tez-Silva

    (SUNY-Stony Brook)

  • Frank Heiland

    (Florida State University, Tallahassee)

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

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Policy Analysis and Management.

Volume (Year): 26 (2007)
Issue (Month): 3 ()
Pages: 527-555

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Handle: RePEc:wly:jpamgt:v:26:y:2007:i:3:p:527-555

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Web page: http://www3.interscience.wiley.com/journal/34787/home

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  1. Burtless, Gary & Moffitt, Robert A, 1985. "The Joint Choice of Retirement Age and Postretirement Hours of Work," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 3(2), pages 209-36, April.
  2. Honig, Marjorie & Reimers, Cordelia, 1989. "Is It Worth Eliminating the Retirement Test?," American Economic Review, American Economic Association, American Economic Association, vol. 79(2), pages 103-07, May.
  3. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics, EconWPA 9406005, EconWPA, revised 06 Jul 1994.
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  7. Jonathan Gruber & Peter Orszag, 1999. "What To Do About The Social Security Earnings Test?," Issues in Brief, Center for Retirement Research ib-1, Center for Retirement Research.
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  9. Martha Starr-McCluer & Annika Sunden, 1999. "Workers' knowledge of their pension coverage: a reevaluation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-05, Board of Governors of the Federal Reserve System (U.S.).
  10. Leora Friedberg, 1998. "The Social Security Earnings Test and Labor Supply of Older Men," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy, Volume 12, pages 121-150 National Bureau of Economic Research, Inc.
  11. Cordelia Reimers & Marjorie Honig, 1996. "Responses to Social Security by Men and Women: Myopic and Far-Sighted Behavior," Journal of Human Resources, University of Wisconsin Press, vol. 31(2), pages 359-382.
  12. Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series, Federal Reserve Bank of Chicago WP-00-2, Federal Reserve Bank of Chicago.
  13. Hugo Benítez-Silva & Debra Sabatini Dwyer & Warren Sanderson, 2006. "A Dynamic Model of Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle," Working Papers, University of Michigan, Michigan Retirement Research Center wp134, University of Michigan, Michigan Retirement Research Center.
  14. Jonathan Gruber & Peter Orszag, 2000. "Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?," NBER Working Papers 7923, National Bureau of Economic Research, Inc.
  15. Mark E. Votruba, 2003. "Social Security and Retirees' Decision to Work," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 853, Princeton University, Department of Economics, Industrial Relations Section..
  16. Steven Haider & Gary Solon, 2000. "Non Random Selection in the HRS Social Security Earnings Sample," Working Papers, RAND Corporation Publications Department 00-01, RAND Corporation Publications Department.
  17. Honggao Cao & Daniel H. Hill, 2005. "Knowledge and Preference in Reporting Financial Information," Working Papers, University of Michigan, Michigan Retirement Research Center wp100, University of Michigan, Michigan Retirement Research Center.
  18. Blinder, Alan S. & Krueger, Alan B., 2004. "What Does the Public Know about Economic Policy, and How Does It Know It?," IZA Discussion Papers 1324, Institute for the Study of Labor (IZA).
  19. Alan L. Gustman & Thomas L. Steinmeier, 1991. "Changing the Social Security rules for work after age 65," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 44(4), pages 733-745, July.
  20. H. Benitez-Silva & F. Heiland, 2008. "Early claiming of social security benefits and labour supply behaviour of older Americans," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(23), pages 2969-2985.
  21. Hugo Benitez-Silva & Debra S. Dwyer & Frank Heiland & Warren C. Sanderson, 2006. "Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle," Department of Economics Working Papers, Stony Brook University, Department of Economics 06-05, Stony Brook University, Department of Economics.
  22. Reimers, Cordelia & Honig, Marjorie, 1993. "The Perceived Budget Constraint under Social Security: Evidence from Reentry Behavior," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 11(1), pages 184-204, January.
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Cited by:
  1. Hugo Benitez-Silva & Debra S. Dwyer & Frank Heiland & Warren C. Sanderson, 2006. "Retirement and Social Security Reform Expectations: A Solution to the New Early Retirement Puzzle," Department of Economics Working Papers, Stony Brook University, Department of Economics 06-05, Stony Brook University, Department of Economics.
  2. Hugo Benitez-Silva & Na Yin, 2007. "An Empirical Study of the Effects of Social Security Reforms on Claming Behavior and Benefits Receipt Using Aggregate and Public-Use Administrative Micro Data," Department of Economics Working Papers, Stony Brook University, Department of Economics 07-05, Stony Brook University, Department of Economics.
  3. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1275, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Silva, José I. & Vall-Castello, Judit, 2012. "Why Are So Many Disabled Individuals Not Working in Spain? A Job Search Approach," IZA Discussion Papers 6317, Institute for the Study of Labor (IZA).
  5. Hugo Benitez-Silva & Frank Heiland, 2008. "Early Retirement, Labor Supply, and Benefit Withholding: The Role of the Social Security Earnings Test," Working Papers, University of Michigan, Michigan Retirement Research Center wp183, University of Michigan, Michigan Retirement Research Center.
  6. Selahattin Imrohoroglu & Sagiri Kitao, 2010. "Social Security, Benefit Claiming and Labor Force Participation: A Quantitative General Equilibrium Approach," Working Papers, Center for Retirement Research at Boston College wp2010-02, Center for Retirement Research, revised Mar 2010.
  7. Judit Vall Castello, 2010. "Promoting Employment of Disabled Women in Spain; Evaluating a Policy," Working Papers 2010-10, FEDEA.
  8. Vere, James P., 2011. "Social Security and elderly labor supply: Evidence from the Health and Retirement Study," Labour Economics, Elsevier, Elsevier, vol. 18(5), pages 676-686, October.
  9. Kudrna, George & Woodland, Alan, 2011. "An inter-temporal general equilibrium analysis of the Australian age pension means test," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(1), pages 61-79, March.

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