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The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenues

  • Anthony J. Pallechio
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    In this study the social security earnings test is shown to have a significant effect empirically on the labor supply of retirement aged men. A rich data file from the Social Security Administration containing accurate benefit information provides a cross- section sample of 65-70 year old married men who worked some amount for empirical investigation. The data pertain to 1972. The results indicate that eliminating the earnings test would increase labor supply by 151 annual hours and payroll tax revenue by $31 per individual in the sample. The way in which the earnings test is relaxed is important also. Raising the exempt amount increased labor supply while lowering the tax rate did not. This follows from analyzing labor supply decisions over a nonlinear earnings-tested budget constraint. An econometric technique was developed for consistently estimating labor supply over nonlinear budget constraints. This technique conveniently summarized the budget constraint in an expected value calculation.

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    File URL: http://www.nber.org/papers/w0272.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0272.

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    Date of creation: Aug 1978
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    Publication status: published as Pellechio, Anthony. "The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenues." Journal of Public Economics, Vol . XIV, No. 2, (October 1980).
    Handle: RePEc:nbr:nberwo:0272
    Note: PE
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    1. Michael J. Boskin & Michael D. Hurd, 1977. "The Effect of Social Security on Early Retirement," NBER Working Papers 0204, National Bureau of Economic Research, Inc.
    2. Boskin, Michael J, 1977. "Social Security and Retirement Decisions," Economic Inquiry, Western Economic Association International, vol. 15(1), pages 1-25, January.
    3. Reuben Gronau, 1974. "The Effect of Children on the Housewife's Value of Time," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 457-490 National Bureau of Economic Research, Inc.
    4. Campbell, Colin D & Campbell, Rosemary G, 1976. "Conflicting Views on the Effect of Old-Age and Survivors Insurance on Retirement," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 369-88, September.
    5. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July.
    6. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
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