Why the Social Security Earnings Penalty Should Be Repealed

Policy Backgrounders | Social Security

No. 152
Monday, February 28, 2000
by Bruce Bartlett


  1. For example, the Washington Post routinely decries any modification of the earnings test while strenuously defending a worker's right to benefits. See its editorials on March 15, 1996; December 3, 1995; January 17, 1995; January 17, 1991; December 2, 1989; and April 19, 1989.
  2. Marshall R. Colberg, The Social Security Retirement Test: Right or Wrong? (Washington: American Enterprise Institute, 1978), p. 2; C. Eugene Steuerle and Jon M. Bakija, Retooling Social Security for the 21st Century (Washington: Urban Institute Press, 1994), p. 226; and William Graebener, A History of Retirement (New Haven: Yale University Press, 1980), p. 186.
  3. See "Brain Drain," Business Week, September 20, 1999, pp. 112-126.
  4. See Committee for Economic Development, New Opportunities for Older Workers (1999).
  5. Eugene Steuerle, Christopher Spiro, and Richard W. Johnson, "Can Americans Work Longer?" Straight Talk on Social Security and Retirement Policy No. 5 (Washington: Urban Institute, 15 August 1999), available at http://www.urban.org/retirement/st/Straight5.pdf. A recent government report also suggests that estimates of rising life expectancy in the future may be understated. See Social Security Advisory Board, The 1999 Technical Panel on Assumptions and Methods, .
  6. House Ways & Means Committee, 1998 Green Book (Washington: U.S. Government Printing Office, 1998), p. 33.
  7. Bertram Kestenbaum, Michael Shakleford, and Chris Champlain, "Effect on Benefits of Earnings at Ages 65 or Older, 1995," Social Security Bulletin, Vol. 62, No. 1, 1999, pp. 4-9. For data on earlier years, see Joseph Bondar, "Beneficiaries Affected by the Annual Earnings Test, 1989," Social Security Bulletin, Vol. 56, No. 1, Spring 1993, pp. 20-28.
  8. Kestenbaum, Shakleford and Chaplain, op. cit.
  9. Policymakers often overlook the more punitive earnings test for those taking early retirement. See Eugene Steuerle and Christopher Spiro, "Are Policymakers Overlooking a Second Earnings Test?" Straight Talk on Social Security and Retirement Policy No. 9 (Washington: Urban Institute, 15 October 1999), available at http://www.urban.org/retirement/st/Straight9.pdf. The authors note that under current law, this more punitive earnings test will apply to more people as the normal retirement age is raised to 67. This will make workers between the ages of 65 and 66 subject to the high de facto tax rates that now apply only to those ages 62 to 64.
  10. See John Goodman, "Raising the Earnings Limit," National Center for Policy Analysis Brief Analysis No. 149, January 31, 1995, available at http://www.ncpa.org/ba/ba149.html.
  11. See Nathan Oestreich, Howard Toole, and Oliver Galbraith, "Restoring the Incentive for the Elderly to Work," Tax Notes, Vol. 49, No. 4, October 22, 1990, pp. 469-71.
  12. John R. Gist and Janemarie Mulvey, "Marginal Tax Rates and Older Workers," Tax Notes, Vol. 49, No. 6 November 5, 1990, pp. 679-94.
  13. Bureau of Labor Statistics data available at http://stats.bls.gov.
  14. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington: U.S. Government Printing Office, 1975), Part 1, p. 132. See also Roger L. Ransom and Richard Sutch, "The Labor of Older Americans: Retirement of Men On and Off the Job, 1870-1937," Journal of Economic History, Vol. 46, No. 1, March 1986, pp. 1-30.
  15. It is worth noting that when Social Security was first established, age 65 was greater than the male life expectancy at birth. See Historical Statistics, Part 1, p. 56.
  16. Historically, this has been the greatest political barrier to elimination of the earnings test despite broad bipartisan support for doing so. See Helen Dewar, "Senate Blocks Rise in Social Security Earning Limit," Washington Post, November 3, 1995; Kitty Dumas, "Budget-Buster Hot Potato: The Earnings Test," Congressional Quarterly, January 11, 1992, pp. 52-55; Julie Kosterlitz, "Working for a Price," National Journal, February 6, 1988, pp. 318-21.
  17. Actually, the DRC is calculated on a monthly basis, meaning that those who lose benefits because of the earnings test get some of it back.
  18. Courtney Coile et. al., "Delays in Claiming Social Security Benefits," National Bureau of Economic Research Working Paper No. 7318, August 1999, available at http://www.nber.org/papers/w7318.
  19. The DRC was only 3 percent until 1989. Thus any studies based on this lower figure will grossly overestimate the budgetary cost of eliminating the earnings test, compared with a 6 percent or 8 percent rate.
  20. Note that in 2008, when the DRC is fully phased in, the age at which one may receive full benefits will be 66, and will continue rising to age 67 thereafter. This suggests a need to change the age at which the DRC is capped from age 70 to age 72, or else future workers will not get as much value from the DRC as current workers do.
  21. Jonathan Gruber and Peter Orszag, "What To Do About the Social Security Earnings Test?" Issue in Brief No. 1 (Boston: Center for Retirement Research, Boston College, July 1999), available at http://www.bc.edu/ .
  22. Recent estimates of how much the labor supply would rise from elimination of the earnings test suggest that the magnitude could be fairly large. See Leora Friedberg, "The Labor Supply Effects of the Social Security Earnings Test," National Bureau of Economic Research Working Paper No. 7200, June 1999; idem, "The Social Security Earnings Test and Labor Supply of Older Men," in James M. Poterba, ed., Tax Policy and the Economy, Vol. 12 (Cambridge: MIT Press, 1998), pp. 121-50. Earlier studies generally found much lower labor responses. See Marjorie Honig and Cordelia Reimers, "Is It Worth Eliminating the Retirement Test?" American Economic Review, Vol. 79, No. 2 May 1989, pp. 103-107; Michael V. Leonesio, "The Effects of the Social Security Earnings Test on the Labor-Market Activity of Older Americans: A Review of the Evidence," Social Security Bulletin, Vol. 53, No. 5, May 1990, pp. 2-21; Michael D. Packard, "The Earnings Test and the Short-Run Work Response to Its Elimination," Social Security Bulletin, Vol. 53, No. 9, September 1990, pp. 3-16. Two early studies that did find a high labor response to reduction of the earnings penalty are Michael J. Boskin, "Social Security and Retirement Decisions," Economic Inquiry, Vol. 15, No. 1, January 1977, pp. 1-25; and Anthony J. Pellechio, "The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenue," National Bureau of Economic Research Working Paper No. 272, August 1978.
  23. Gary Robbins and Aldona Robbins, "Retiring the Social Security Earnings Test," Institute for Policy Innovation Issue Brief, May 6, 1999, available at www.ipi.org. Another study found that the main long-run cost from eliminating the earnings test came from the recomputation of benefits. See Alan L. Gustman and Thomas L. Steinmeier, "Changing the Social Security Rules for Work After 65," Industrial & Labor Relations Review, Vol. 44, No. 4, July 1991, pp. 733-45. My guess is that most seniors would happily give up any recomputation of benefits for work after age 65 in return for abolition of the earnings test.
  24. Press reports indicate that many baby boomers don't wish to ever retire. See "So Who Wants to Retire?" Business Week, November 8, 1999, p. 8; Gene Epstein, "A Big New Wrinkle," Barron's, September 6, 1999, pp. 27-29; John Authers, "Boomers Want to Work Forever," Financial Times, October 30, 1998.
  25. The President said, "we should eliminate the limits on what seniors on Social Security can earn." Congressional Record, January 19, 1999, p. H259. In an interview with reporters on February 1, 2000, he said, "I think that something that costs money in the short run, but makes you money in the long run is lifting the earnings limits. And we plainly ought to do that." http://www.nytimes.com/yr/mo/day/news/financial/clinton-text.html on February 2, 2000. His latest comment came in an interview with CNN on February 14, 2000. He said, "I like getting rid of the earnings limitation. It's the right thing to do." John F. Harris and Juliet Eilperin, "Social Security Earnings Limit Targeted," Washington Post, February 15, 2000.

Read Article as PDF