The Minimum Wage and Incentives for Full-Time Work Under the Social Security Retirement Earnings Test

Abstract

This paper examined how the earnings test affects the hours and employment of men who claim early benefits. It uses 1982-2016 data from the Current Population Survey and 1992-2014 data from the Health and Retirement Study. Critical components of the analysis include the idea that for any fixed earnings-test threshold amount, an increase in the hourly wage at which a beneficiary can work reduces the number of hours needed annually to hit the threshold. This feature of the test and substantial state-by-calendar year variation from increases in the minimum wage, which lower the threshold level of hours at which the earnings test binds, are used to identify the impact of the test on labor supply on the intensive and extensive margins for men who claim early.

The paper found that:

• A substantial proportion of 62- to 64-year-old men report rigidities in their choice of hours, which implies that the earnings test may have asymmetric impacts on labor supply around full-time, full-year hours.
• When the minimum wage increases and pushes threshold hours below full-time, full-year hours, the likelihood of working full-time, full-year falls by 30 percentage points; when the minimum wage decreases and pushes threshold hours above full-time, full-year hours, the likelihood of working full-time, full-year rises by 20 percentage points.
• There are similar asymmetric effects around full-time, full-year hours for annual hours and employment, respectively.

 
The policy implications of the findings are:

• There are large impacts of the earnings test on the work decisions of beneficiaries under the Full Benefit Age.
• Increases in the minimum wage result in a decline in work among beneficiaries under the Full Benefit Age.