Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?
The 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 viewed as a tax on working. As a result, it is commonly viewed as an important disincentive to paid work for older Americans.
The purpose of our paper is to update and extend the previous literature on the earnings test by examining the impact of changes in the earnings test on the decision to work, aggregate hours supplied, and claiming behavior for both men and women. Over the past three decades, the structure of the earnings test has changed significantly. To examine the impact of these changes on labor supply and benefits receipt, we use data from twenty–five years of the March Supplement to the Current Population Survey (CPS), which provide large samples of observations on the elderly. We first present simple graphical analysis, in order to illustrate the relationship between program parameter changes and labor supply/claiming decisions. We then examine regression models that combine the information across years in a simple reduced form framework to estimate earnings test impacts.
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 work decisions, reveal any significant impact of changes in earnings test parameters on aggregate employment, hours of work, or earnings for men. For women, there is some more suggestive evidence that the earnings test is affecting labor supply decisions, particularly earnings. Second, loosening the earnings test appears to accelerate benefits receipt among the eligible population.