Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?
The Social Security earnings test, which currently 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 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 immediate influence on the labor supply decisions of men. We find no evidence of a significant impact of changes in earnings test parameters on aggregate employment, hours of work, or earnings immediately following the changes. We find some suggestive evidence for a labor supply response among women, but it is not robust. 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.