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The social Security Retirement Earnings Test, Retirement and Benefit Claiming

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  • Alan L. Gustman
  • Thomas L. Steinmeier

Abstract

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10905.

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Date of creation: Nov 2004
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Publication status: published as Alan L. Gustman and Thomas L. Steinmeier. "Projecting Behavioral Responses to the Next Generation of Retirement Policies". Research in Labor Economics, Vol. 28, 2008, pp. 141-196.
Handle: RePEc:nbr:nberwo:10905

Note: AG LS PE
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  1. Gustman, Alan L. & Steinmeier, Thomas L., 2005. "Retirement Effects of Proposals by the President's Commission to Strengthen Social Security," National Tax Journal, National Tax Association, vol. 58(1), pages 27-49, March.
  2. Courtney Coile & Peter Diamond & Jonathan Gruber & Alain Jousten, 1999. "Delays in Claiming Social Security Benefits," NBER Working Papers 7318, National Bureau of Economic Research, Inc.
  3. Martin Feldstein & Andrew Samwick, 1992. "Social Security Rules and Marginal Tax Rates," NBER Working Papers 3962, National Bureau of Economic Research, Inc.
  4. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, Elsevier, vol. 57(1), pages 117-146, October.
  5. Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
  6. Roger H. Gordon & Alan S. Blinder, 1980. "Market Wages, Reservation Wages, and Retirement Decisions," NBER Working Papers 0513, National Bureau of Economic Research, Inc.
  7. 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.
  8. Jonathan Gruber & Peter Orszag, 1999. "What To Do About The Social Security Earnings Test?," Issues in Brief ib-1, Center for Retirement Research.
  9. Richard Disney & Sarah Smith, 2002. "The Labour Supply Effect of the Abolition of the Earnings Rule for Older Workers in the United Kingdom," CeRP Working Papers 17, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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Cited by:
  1. Cremer, Helmuth & Lozachmeur, Jean-Marie & Pestieau, Pierre, 2006. "Social Desirability of Earning Tests," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5551, C.E.P.R. Discussion Papers.
  2. Pierre-Carl Michaud & Arthur van Soest, 2007. "How did the Elimination of the Earnings Test above the Normal Retirement Age affect Retirement Expectations?," Social and Economic Dimensions of an Aging Population Research Papers, McMaster University 174, McMaster University.
  3. Engelhardt, Gary V. & Kumar, Anil, 2009. "The repeal of the retirement earnings test and the labor supply of older men," Journal of Pension Economics and Finance, Cambridge University Press, Cambridge University Press, vol. 8(04), pages 429-450, October.
  4. Hugo Benitez-Silva & Frank Heiland, 2006. "The Social Security Earnings Test Revisited: Information, Distortions, and Costs," Department of Economics Working Papers, Stony Brook University, Department of Economics 06-04, Stony Brook University, Department of Economics.
  5. Karen A. Kopecky, 2006. "The Trend in Retirement," 2006 Meeting Papers, Society for Economic Dynamics 187, Society for Economic Dynamics.
  6. Amy Rehder Harris & John Sabelhaus & Almudena Sevilla-Sanz, 2005. "Behavioral Effects of Social Security Reform in a Dynamic Micro-Simulation with Life-Cycle Agents: Working Paper 2005-06," Working Papers, Congressional Budget Office 16494, Congressional Budget Office.
  7. Hugo Benitez-Silva & Frank Heiland, 2005. "Early Claiming of Social Security Benefits and Labor Supply Behavior of Older Americans," Department of Economics Working Papers, Stony Brook University, Department of Economics 05-05, Stony Brook University, Department of Economics.
  8. 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.
  9. Alan L. Gustman & Thomas L. Steinmeier, 2005. "Retirement, Saving, Benefit Claiming and Solvency Under A Partial System of Voluntary Personal Accounts," Working Papers, University of Michigan, Michigan Retirement Research Center wp105, University of Michigan, Michigan Retirement Research Center.
  10. 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.
  11. David S. Loughran & Steven Haider, 2007. "Do the Elderly Respond to Taxes on Earnings? Evidence from the Social Security Retirement Earnings Test," Working Papers, RAND Corporation Publications Department 223-1, RAND Corporation Publications Department.
  12. 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.

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