Retirement and Economic Behavior

By Henry J. Aaron; Gary Burtless | Go to book overview

Gary Burtless and Robert A. Moffitt


The Effect of Social Security Benefits on the Labor Supply of the Aged

The social security system has had a profound effect on the well-being of America's elderly, making it by far the most popular legacy of the New Deal. In recent years, however, the system has come under increasing attack because of its mounting cost and the growing suspicion that it has depressed economic growth by discouraging private saving and encouraging early retirement. In this paper we examine the impact of social security benefits on labor supply of the aged. The payroll tax used to finance social security also influences labor supply decisions of the nonaged, but we will not address this effect here. We are particularly concerned with social security's effect on two aspects of labor supply among the elderly: the age at retirement and the level of work effort after retirement.

The question of whether social security affects decisions regarding retirement age and postretirement labor supply and the extent of that effect is an important issue in current discussions of the program. The system was designed to provide retirement income to the aged population of the United States and to maintain consumption levels for the aged after retirement. If the provision of such benefits causes substantial disincentive effects either on labor supply or on saving for retirement, the goal of the program is to some degree frustrated because reductions in labor supply or saving result in reductions in private resources available to finance retirement that may offset the gains represented by social security benefits. In addition, any disincentive effects on labor supply of the aged will increase the budgetary cost of the program, raise

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We gratefully acknowledge the computational assistance of Paul E. Morawski, Diane Levin, and Karen Hanovice and the comments of Alan Fox, Cordelia Reimers, and Sherwin Rosen.

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