Social Security recipients lose $1 for every $2 they earn over $9,600 if they are under 65. Those between 65 and 69 lose $1 for every $3 they earn over $15,500. While the limit for the latter group will rise to $30,000 in 2002, the penalties are driving pensioners from the work force at the very time employers are desperate for workers.

A new study from the National Bureau of Economic Research suggests that doing away with the penalties would not only induce seniors to continue working, but it could be done at little if any cost to the government.

According to the author of the study, Leora Friedberg of the University of California at San Diego:

• Many workers will boost their work effort in 2002, when the limit is raised to $30,000.

• Some high-wage workers who lost benefits in the past will now choose leisure over work and actually work a bit less -- offsetting the increased hours put in by the first group.

• If the earnings test were eliminated entirely, the total labor supplied by affected seniors would rise by 5.3 percent.

Today, those who lose Social Security benefits because of the penalties receive compensating increases in future benefits due to their continued work; thus eliminating the earnings penalty would not cost much more in the long-run.

Source: Gene Koretz, "Cut Working Seniors' Taxes," Business Week, July 26, 1999.

For NBER text http://papers.nber.org/papers/W7200