Persistence in Labor Supply and the Response to the Social Security Earnings Test
Social Security beneficiaries who earn too much suffer a reduction in their benefits due to the Social Security earnings test. This paper investigates the impact on labor supply of changes in the earnings test rules in 1996 and 2000. We highlight how the persistence of labor supply choices influences these responses. First, we compare employment transitions across cohorts that are differentially affected by changes in the earnings test rules. We find major differences in how workers and non-workers responded, and that flows into full-time versus part-time work were altered as well. Second, we test the effect of not only current but also anticipated and past earnings test rules. We find that current values of earnings test parameters become less important when we control for measures of future and past parameters. For example, one specification shows that a 10% increase in current and future values of the earnings test threshold results in almost a half-percentage-point increase in employment at the current age, implying that the 1996 legislation raised employment by 1.8 percentage points when comparing the cohort reaching age 62 in 1995 versus 1996. We also use the estimates to simulate the elimination of the earnings test in 2000. In one set of results, employment is predicted to rise by around two percentage points at ages 66-69 and by 3.5 points at age 65 in 2000 due to the elimination of the earnings test, with persistent increases for the same cohorts as they age over a few years.