The Perceived Budget Constraint under Social Security: Evidence from Reentry Behavior
If, as is usually assumed, older individuals face a continuous choice of work hours without fixed costs or take account of the actuarial adjustment of Social Security benefits postponed as a result of the earnings test, the earnings limit should not affect their labor supply before age sixty-five. The authors test, and reject, these assumptions by estimating the hazard function for labor-market reentry after retirement using white men in the Retirement History Survey. They find that the earnings limit does affect reentry and that older men behave myopically, responding to current benefits rather than to Social Security wealth. Several policy implications follow. Copyright 1993 by University of Chicago Press.