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Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?

Author

Listed:
  • Jonathan Gruber
  • Peter Orszag
Abstract
The Social Security earnings test, a version of which still applies to those ages 62-64, reduces immediate payments to beneficiaries whose labor income exceeds a given threshold. Although benefits are subsequently increased to compensate for any such reduction, the earnings test is typically perceived as a tax on working. As a result, it is considered by many to be an important disincentive to paid work for older Americans. Yet there is little evidence to suggest an economically significant effect of the earnings test on hours of work, and almost no research on the effect of the test on the decision to work at all. We investigate these issues using the significant changes in the structure of the earnings test over the past 25 years, using data over the past 25 years, using data over the 1973-1998 period from the March Supplement to the Current Population Survey (CPS), which provide large samples of observations on the elderly. Our analysis suggests two major conclusions. First, the earnings test exerts no robust influence on the labor supply decisions of men. Neither graphical analyses of breaks in labor supply trends, nor regression estimates that control for underlying trends in labor supply by age group, reveal any significant impact of changes in earnings test parameters on aggregate employment, hours of work, or earnings for men. For women, there is more suggestive evidence that the earnings test is affecting labor supply decisions. Second, loosening the earnings test appears to accelerate benefits receipt among the eligible population, lowering benefits levels, and heightening concerns about the standard of living of these elderly at very advanced ages. Our findings suggest some cause for caution before rushing to remove the earnings test at younger ages.

Suggested Citation

  • Jonathan Gruber & Peter Orszag, 2000. "Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?," NBER Working Papers 7923, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7923
    Note: AG LS PE
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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