What to Do about the Social Security Earnings Test?
The Social Security retirement earnings test is one of the least popular — and least understood — aspects of the Social Security system. Under the retirement earnings test, Social Security benefits of recipients aged 62 to 70 are reduced by between 33 cents and 50 cents for each dollar earned above a floor amount, and benefits are subsequently increased after work ceases. The earnings test has been criticized as a significant deterrent to labor supply among older workers, and politicians from across the political spectrum support its repeal. This issue in brief has three sections. The first section describes how the earnings test works, exploring the myriad misunderstandings about the system. The second reviews the literature on the labor supply effects of the earnings test for older workers. The third section reviews policy options. Our conclusion is that there is a reasonably strong argument that the earnings test for those above the full benefit age should be eliminated, but that the earnings test for those below the full benefit age should be retained. Throughout the paper, we examine the impact of the earnings test on two different sets of beneficiaries: 1) Those who do not change the age at which they claim benefits but do change their work patterns because of the earnings test, and 2) Those who delay claiming benefits because of the earnings test.
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