Jonathan Gruber () (Center for Retirement Research at Boston College) Peter Orszag
Abstract
On April 7, 2000, President Clinton signed into law the ìSenior Citizens Freedom to Work Act of 2000,î which eliminated the unpopular earnings test that applied to those over the Social Security normal age of retirement (currently age 65). The 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 viewed as a tax on working. As a result, it is commonly viewed as an important disincentive to paid work for older Americans. For example, when President Clinton signed the legislation that removed the earnings test for beneficiaries at or above the normal retirement age, he noted, ìbecause of the Social Security retirement earnings test, the system withholds benefits from over 800,000 older working Americans and discourages countless more ñ no one knows how many ñ from actually seeking work.î Similarly, Alan Greenspan recently stated that with the elimination of the earning test, ìthe presumption, of course, is that you'll get an increase in the number of retired people coming back into the work force.î Despite this rhetoric, a careful reading of the literature on the earnings test produces very mixed conclusions as to its labor supply effects. Two principal types of past studies examine the labor supply impact from the earnings test. One part of the literature involves studying the earnings ìbunchingî at the earnings test limits. For example, echoing earlier findings, Friedberg (1998) documents that significantly more workers earned amounts just below the earnings test limit than either significantly below that limit or above it. The other approach to examining the earnings test involves more sophisticated econometric analyses of the implications for the labor supply decisions of older workers of the kinked budget constraint that results from the earnings test. Traditionally, these studies suggested negligible effects of the earnings test on labor supply. Friedberg (1998) found more sizeable impacts, which suggest that removal of the earnings test for workers over age 65 would raise the hours of work of affected workers by 5 percent. Each of these literatures has important weaknesses, however. The ìbunchingî literature is cleanly identified, particularly when it examines how the bunching changes as the earnings test limits change. But this literature is uninformative about the aggregate labor supply impacts of the earnings test, or indeed even about the sign of the impact, since bunching could be occurring from below as well as above. The ìkinked budget constraintî literature addresses the aggregate labor supply impacts of the earnings test among those working, but does so using an econometric framework which imposes a variety of structural assumptions that have been strongly criticized in labor economics in recent years. Moreover, even this literature speaks only to the impact of the earnings test on conditional hours worked, and not on the decision to supply labor in the market at all. As the quotations above indicate, much of the policy interest in the earnings test arises from the prospect that it is deterring older workers from seeking or keeping jobs in the first place. And the previous literature has focused almost exclusively on the impact of the earnings test on men, despite the fact that women increasingly make up an important part of the labor force at older ages. Finally, the past literature has not considered the impact of the earnings test on benefits receipt. The major concern of opponents of removing the earnings test, particularly for workers at ages 62-64, is that it will lead to increased early claiming of benefits (Gruber and Orszag, 1999). The argument is that workers may myopically claim benefits early if they can do so while still working, and as a result end up with a lower standard of living for themselves (and their widows/widowers) later in life. But there is no evidence to date regarding the impact of the earnings test per se on benefits receipt. The purpose of our paper is to update and extend the previous literature on the earnings test by examining the impact of changes in the earnings test on the decision to work, aggregate hours supplied, and claiming behavior for both men and women. Over the past three decades, the structure of the earnings test has changed significantly. To examine the impact of these changes on labor supply and benefits receipt, we use data from twenty-five years of the March Supplement to the Current Population Survey (CPS), which provide large samples of observations on the elderly. We first present simple graphical analysis, in order to illustrate the relationship between program parameter changes and labor supply/claiming decisions. We then examine regression models that combine the information across years in a simple reduced form framework to estimate earnings test impacts. 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 work decisions, reveal any significant impact of changes in earnings test parameters on aggregate employment, hours of work, or earnings for men. For women, there is some more suggestive evidence that the earnings test is affecting labor supply decisions, particularly earnings. Second, loosening the earnings test appears to accelerate benefits receipt among the eligible population.
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COILE, Courtney & DIAMOND, Peter & GRUBER, Jonathan & JOUSTEN, Alain, 2000.
"Delays in claiming social security benefits,"
CORE Discussion Papers
2000029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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