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The social security earnings test and work incentives

  • Hugo Ben�tez-Silva

    (SUNY-Stony Brook)

  • Frank Heiland

    (Florida State University, Tallahassee)

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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File URL: http://hdl.handle.net/10.1002/pam.20264
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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
Contact details of provider: Web page: http://www3.interscience.wiley.com/journal/34787/home

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  1. Steven Haider & Gary Solon, 2000. "Non Random Selection in the HRS Social Security Earnings Sample," Working Papers 00-01, RAND Corporation Publications Department.
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  9. 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 wp134, University of Michigan, Michigan Retirement Research Center.
  10. Honggao Cao & Daniel H. Hill, 2005. "Knowledge and Preference in Reporting Financial Information," Working Papers wp100, University of Michigan, Michigan Retirement Research Center.
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  12. Giovanni Mastrobuoni, 2007. "Do better–informed workers make better retirement choices? A test based on the Social Security Statement," Carlo Alberto Notebooks 51, Collegio Carlo Alberto.
  13. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
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  19. Reimers, Cordelia & Honig, Marjorie, 1993. "The Perceived Budget Constraint under Social Security: Evidence from Reentry Behavior," Journal of Labor Economics, University of Chicago Press, vol. 11(1), pages 184-204, January.
  20. 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, vol. 3(2), pages 209-36, April.
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