Opinion Editorial | |
| Wednesday, February 3, 1999 | |
Clinton Calls For Eliminating Earnings Test |
Amid Bill Clinton's interminable laundry list of forgettable proposals in his State of the Union Address one stands out as deserving merit. In a throw-away line during his discussion of Social Security, Clinton said, "We should eliminate the limits on what seniors on Social Security can earn." Congress should move swiftly to send him a bill doing exactly what Clinton has suggested.
The issue here is called the "earnings test" and has been part of the Social Security program since its inception. Those receiving Social Security retirement benefits are penalized for having earned income (wages and salaries) over a specified amount. At the beginning this penalty was quite Draconian -- workers lost one full month of benefits for each month in which they earned anything. In other words, his benefits were in effect taxed at a rate of 100 percent even if a worker earned as little as a dollar.
Over time, this rule has been liberalized:
According to the Social Security Administration, 3.5 million people age 62 to 69 have some earned income, about 37 percent of all retirees under the age of 70. In December, 1997, 274,550 workers -- 199,800 men and 74,750 women -- had their Social Security benefits reduced because their earnings exceeded the allowed amount.
The withholding of benefits acts like an additional tax on earnings. In the case of retirees age 65 to 69 it is a 33 percent tax rate, and for those age 62 to 64 it is a 50 percent tax rate. And these implicit tax rates come on top of explicit taxes such as federal and state income taxes, including taxes on Social Security benefits for those whose incomes are high enough. Of course, older workers also continue to pay Social Security taxes as well.
These high effective tax rates have a major impact on the employment status of older workers. They are a major reason why in 1997 only 17.1 percent of men age 65 and older were in the labor force, either by working or seeking work. Fifty years ago, 47 percent of such men were still in the labor force. At the turn of the century the figure was close to 60 percent.
As a consequence, economists have estimated that a significant percentage of current retirees would have continued working if they could also receive full Social Security benefits. The latest research, by economist Leora Friedberg of the University of California - San Diego, shows that elimination of the earnings test would increase the aggregate labor supply in the U.S. economy by 5.3 percent. This could be very important at a time when many businesses are suffering from a shortage of skilled workers.
The main argument against eliminating the earnings test is cost. Workers who are losing benefits would now receive them, adding billions of dollars to Social Security outlays. However, expansion of employment and earnings by older workers will recoup much of this loss through higher revenues. In any case, it is an issue of fairness. People may now receive an unlimited amount of so-called unearned income from financial investments, such as dividends and interest, without losing any benefits. Those who have invested in human capital and receive wages should be treated equally.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 3, 1999.
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