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The social security earnings test and work incentives

Author

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  • Hugo Benítez-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

Suggested Citation

  • Hugo Benítez-Silva & Frank Heiland, 2007. "The social security earnings test and work incentives," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 26(3), pages 527-555.
    • Handle: RePEc:wly:jpamgt:v:26:y:2007:i:3:p:527-555
    DOI: 10.1002/pam.20264
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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 of Labor Economics (IZA).
    2. Frank W. Heiland & Na Yin, 2014. "Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?," Working Papers wp307, University of Michigan, Michigan Retirement Research Center.
    3. Leonard E. Burman & Norma B. Coe & Kevin Pierce & Liu Tian, 2014. "The Effects of the Taxation of Social Security Benefits on Older Workers’ Income and Claiming Decisions," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(2), pages 459-486, June.
    4. Silva, José I. & Vall-Castelló, Judit, 2017. "Partial disability and labor market adjustment: The case of Spain," Labour Economics, Elsevier, vol. 48(C), pages 23-34.
    5. 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 06-05, Stony Brook University, Department of Economics.
    6. 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 07-05, Stony Brook University, Department of Economics.
    7. Kudrna, George & Woodland, Alan, 2011. "An inter-temporal general equilibrium analysis of the Australian age pension means test," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 61-79, March.
    8. 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 1275, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2014. "Reforming the U.S. Social Security system accounting for employment uncertainty," Working Papers 2014-12, FEDEA.
    10. Vall Castello, Judit, 2012. "Promoting employment of disabled women in Spain; Evaluating a policy," Labour Economics, Elsevier, vol. 19(1), pages 82-91.
    11. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2015. "The Effects of Employment Uncertainty, Unemployment Insurance, and Wealth Shocks on the Retirement Behavior of Older Americans," Working Papers 2015-06, FEDEA.
    12. Hugo Benitez-Silva & Frank Heiland, 2008. "Early Retirement, Labor Supply, and Benefit Withholding: The Role of the Social Security Earnings Test," Working Papers wp183, University of Michigan, Michigan Retirement Research Center.
    13. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    14. Laun, Lisa, 2017. "The effect of age-targeted tax credits on labor force participation of older workers," Journal of Public Economics, Elsevier, vol. 152(C), pages 102-118.
    15. Vere, James P., 2011. "Social Security and elderly labor supply: Evidence from the Health and Retirement Study," Labour Economics, Elsevier, vol. 18(5), pages 676-686, October.

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