Academic journal article Social Security Bulletin

Modeling Behavioral Responses to Eliminating the Retirement Earnings Test

Academic journal article Social Security Bulletin

Modeling Behavioral Responses to Eliminating the Retirement Earnings Test

Article excerpt

The retirement earnings test (RET) is an often-misunderstood aspect of the Social Security program. Proposed RET reforms meant to encourage working at older ages could also cause earlier benefit claiming. We use Modeling Income in the Near Term data to analyze the complete repeal of the earnings test for beneficiaries aged 60 or older, first assuming no behavioral responses to repeal and secondly assuming changes to benefit claiming and workforce participation behaviors. We find that beneficiaries affected by RET repeal would generally receive significantly higher benefits when they are younger than the full retirement age (FRA), and somewhat lower benefits after reaching FRA. RET repeal would not significantly change individuals' lifetime benefits and we find no significant changes in the overall poverty rate under either scenario. We find that assumed behavioral responses-particularly the benefit claiming change-have a bigger effect on lifetime benefits than the RET policy change itself.

Introduction

The retirement earnings test (RET) is an often-misunderstood aspect of the Social Security program. Individuals who claim retirement benefits before they have reached full retirement age (FRA) and continue working may have some or all of their monthly Social Security benefits withheld if they earn more than the RET thresholds. Beneficiaries generally understand this aspect of the RET and it usually acts as a disincentive to work at older ages. Less understood is the fact that any benefits withheld under the RET are credited back once the beneficiary attains FRA, resulting in a permanent monthly increase in benefits. Policymakers have suggested reforming the RET to encourage continued workforce participation among older workers. However, changes to the RET could also cause early benefit claiming. Indeed, the literature suggests that eliminating the RET would likely result in three behaviors among older workers: increased earnings, longer labor force participation, and earlier benefit claiming. It is important for policymakers to understand how those effects could offset one another for the beneficiary population as a whole.

We fill a gap in the existing literature by using recent research to make assumptions about how beneficiaries' work and claiming behavior may respond to changing incentives. We model complete repeal of the RET and compare it to benefits scheduled to be paid under current law, first assuming no behavioral responses and secondly assuming changes to earnings, labor force participation, and claiming behavior. We base these assumptions on evidence of how individuals responded to the 2000 legislation that eliminated the earnings test for beneficiaries between FRA and age 70.

This article describes the RET, including its legislative history and the estimated number of beneficiaries it currently affects. The article then compiles evidence from the literature showing how the RET has historically affected older workers' earnings, labor force participation, and claiming behavior. Lastly, it includes distributional analysis for Social Security beneficiaries aged 60 or older based on projections from the Modeling Income in the Near Term, version 6 (MINT6) model to show the effects of RET repeal under static and behavioral-response assumptions.

Description of the RET

The earnings test applies to beneficiaries who are younger than their FRAs-the ages at which they become eligible for unreduced retirement benefits. For every month before FRA that a beneficiary receives benefits, regardless of work status, the monthly benefit amount is subject to early retirement reduction factors, resulting in a lower benefit. The earliest eligibility age for retirement benefits is 62, and the FRA varies from 65 to 67 depending on the worker's year of birth.1 The RET applies to individuals who are receiving Social Security retirement benefits (either as a retired-worker or an auxiliary beneficiary), working, and younger than their FRA. …

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