Academic journal article Atlantic Economic Journal

How Social Security's Earning Test, Age and Education Affect Female Labor Supply

Academic journal article Atlantic Economic Journal

How Social Security's Earning Test, Age and Education Affect Female Labor Supply

Article excerpt


In January 2000, every Social Security recipient attaining the defined normal retirement age (NRA) was no longer subject to the Retirement Earnings Test (RET). Prior to 2000, all recipients below 70 years of age were subject to the RET. So, if earnings exceeded a legislatively defined minimum, benefits were reduced either $1 for each $2 earned or $1 for each $3 earned depending on whether the recipient had attained the NRA. After 2000, female workers whose age was less than their NRA but 62 or greater, could collect Social Security benefits; but those benefits were still subject to the RET. Economists famously argue that incentives matter. Social Security's RET acts like an extreme payroll tax, reducing take-home income from work effort, reducing the incentive to work and increasing the incentive to consume more leisure.

However, when students in labor economics ask whether a decrease in net wages affects a worker's labor supply, they receive the evasive answer: "It depends." It depends on whether leisure is a normal or an inferior good. If leisure is a normal good, then the substitution and income effects work in opposite directions, and the effect of a decrease in the net wage on a worker's labor supply depends on relative magnitudes of the substitution and income effects.

Over the years, there have been numerous changes to Social Security's RET. Each change has tended to make the RET more complex and less binding. However, budgetary issues have also played a role. In recognition of America's longer life expectancy and in an attempt to increase the solvency of the Social Security Trust fund, Congress set increasing limits for the NRA in 1983. In particular, for those born before 1937, NRA was set at the traditional age of 65. Currently, the NRA for those born during or after 1960 is 67. If a worker was born in 1956, his or her NRA would be 66 years and 4 months.

Elimination of the RET removes a significant payroll tax for those individuals reaching their NRA. Consequently, Social Security recipients in this age group who continue to work receive a substantial increase in their take-home pay. Haider and Loughran (2008) and Song and Manchester (2007) have analyzed how elimination of the RET affects the labor supply of elderly men. Borjas (2016, p. 78) writes

"... theory suggests that the elimination of the Social Security earnings test is unlikely to substantially increase labor supply among retirees. A few studies have examined the labor supply consequences of repealing the earnings test. The evidence confirms the theoretical expectation: the labor supply effects of the repeal tended to be small."

This paper analyzes how the partial elimination of the RET in 2000 affected the labor supply of elderly women whose ages were between 55 and 75. This is a important sample of the population that has been ignored in the literature until now. Using data from the Current Population Survey (CPS) (1), a combined effort of the U.S. Census Bureau (1971-2012) and the Bureau of Labor Statistics, 28 separate time series of monthly data representing various female cohorts aged 55 to 75 were extracted. The data set was partitioned according to race and ethnicity and according to marital status. For the most part, the monthly data ran from January of 1976 through December of 2012.

To test whether elimination of the RET for women reaching their NRA in 2000 affected their labor supply, a difference-in-differences statistical technique pioneered by researchers such as Card and Krueger (1994) was used. This statistical test was applied to 28 different cohorts of women with mostly similar results. After elimination of the RET, the labor-force participation rates of single, divorced, separated and widowed women in the targeted age range usually increased. However, the difference-indifferences estimates also show that the labor-force participation rates of married women in the affected age range fell with elimination of the RET indicating that the existence of a spouse has an important impact on the decision to either remain in or enter the labor force. …

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