Work and Retirement

Policy Backgrounders | Social Security

No. 162
Friday, November 03, 2006
by Liqun Liu and Andrew J. Rettenmaier


  1. The percentage of older men who work has risen slightly since the early to mid-1980s.
  2. See Franco Peracchi and Finis Welch, "Trends in Labor Force Transitions of Older Men and Women," Journal of Labor Economics , Vol. 12, No. 2, 1994, pages 210-242. Also see Alan Krueger and Jorn-Steffen Pischke, "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," Journal of Labor Economics , Vol. 10, No. 4, 1992, pages 412-437. Kruger and Pischke concluded that the growth in the expected lifetime stream of Social Security benefits, or Social Security wealth, cannot explain much of the decline in male labor supply.
  3. Confirming earlier research, economist Michel J. Vanderhart of Deloitte & Touche found that most of the decline in work by retirement-aged men can be explained by the increasing value of Social Security benefits. See Michel J. Vanderhart, "Labor Supply of Older Men: Does Social Security Matter?" Economic Inquiry , Vol. 41, No. 2, 2003, pages 250-263.
  4. As a caveat to the causal relationship between Social Security benefits and labor force participation, note that labor force participation was declining prior to the passage of the Social Security legislation.
  5. For more information, see "Old-Age, Survivors, and Disability Insurance," Annual Statistical Supplement to the Social Security Bulletin, 2005 ( Washington , D.C. : Social Security Administration, February 2006), Table 6.B5. Available at
  6. The earnings test now does not apply to Social Security beneficiaries who have attained normal retirement age. For more information, see "Exempt Amounts Under the Earnings Test," Social Security Administration Web site feature, October 2005. Available at
  7. For example, individuals born in 1941 will reach their normal retirement age of 65 and 8 months this year. For the months in 2006 prior to their reaching 65 and 8 months, this second threshold applies.
  8. Furthermore, the fact that early receipt of benefits provides a basic income stream regardless of a change in job status makes it attractive to individuals who continue to work.
  9. Individuals' observed discount rates, as they pertain to Social Security benefit claiming, combine impatience, subjective mortality assessments and risk-aversion.
  10. Jonathan Gruber and Peter Orszag, "Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?" National Tax Journal , Vol. 56, No. 4, 2003, pages 755-773.
  11. Furthermore, Gustman and Steinmeier estimate that eliminating the earnings test would result in a 10 percentage point increase in benefit claims among men - primarily those who are currently working. See Alan Gustman and Thomas Steinmeier, "The Social Security Retirement Earnings Test, Retirement and Benefit Claiming," National Bureau of Economic Research, Working Paper No. 10905, November 2004.
  12. The "Senior Citizens Freedom to Work Act of 2000."
  13. The data used to make the comparison is from the "Benefits and Earnings Public-Use File, 2004," published by the Social Security Administration. Available at The sample used to produce the graph is limited to retired men. Retirees in each age group are defined as individuals who started claiming benefits at an age younger or equal to the ages in the group.
  14. The exempt amount of wages, or threshold, above which the earnings test applied, was lower for retirees below the normal retirement age than for workers above the normal retirement age. Between 1996 and 1999 the lower threshold rose from $8,280 to $9,600 and the higher one rose from $12,500 to $15,500. Between 2000 and 2003 the lower threshold increased from $10,080 to $11,520. Given that, beginning on January 1, 2000, there was no earnings test for retirees above the normal retirement age, a new threshold was imputed by increasing the higher threshold of $17,000 in 2000 at the same rate as the growth in the lower threshold. A higher threshold continues to apply to earnings earned between the month one reaches age 65 and the normal retirement age. It rises more rapidly than the lower threshold. For this comparison the imputed values are more relevant than the legislated values.
  15. Jae G. Song and Joyce Manchester, "New Evidence on Earnings and Benefit Claims Following Changes in the Retirement Earnings Test in 2000," Social Security Administration, Office of Research, Evaluation, and Statistics, July 2006. Song and Manchester found that removing the earnings test had the greatest effect on the earnings of higher earning individuals. They found the increase in labor force participation was the result of older workers staying in the labor force, not workers who had exited coming back.
  16. Leora Friedberg, "The Labor Supply Effects of the Social Security Earnings Test," Review of Economics and Statistics , Vol. 82, 2000, estimates the labor supply elasticity of older men using changes in the earnings test to identify the elasticity. The estimates range between 0.225 and 0.316. By comparison, the elasticity for the workforce as a whole is close to 0.15 based on a survey of estimates in Don Fullerton, "On the Possibility of an Inverse Relationship Between Tax Rates and Government Revenues," Journal of Public Economics, Vol. 19, No. 3, 1982.
  17. Eliminating the payroll tax on older workers would increase their labor force participation, which would increases income tax revenues, but it would also reduce total payroll tax revenues. Individuals age 62 and older earn about 4.7 percent of total taxable wages each year, based on data from the March 2004 supplements to the Current Population Survey. Thus, the maximum cost of eliminating these taxes for Social Security recipients would be less than 5 percent of all payroll tax revenues. However, the revenue loss would be cut in half if only the employer's or employee's portion of the OASI payroll tax (5.3 percent each) were reduced or eliminated.
  18. See Felicitie C. Bell and Michael L. Miller, "Life Tables of the United States Social Security Area 1900-2100," Social Security Administration, Office of the Chief Actuary, Actuarial Study No. 116, SSA Pub. No. 11-11536, August 2002. Available at
  19. Chris Chapman and Alice H. Wade, "Estimated OASDI Long-Range Financial Effects of Several Provisions Requested by the Social Security Advisory Board," Memorandum from the Office of the Chief Actuary, August 10, 2005. The estimates were prepared for the Social Security Advisory Board. Available at
  20. Under current law, the normal retirement age is gradually increasing from age 65 to 66 by two months for each birth year from 1938 through 1942. However, the smooth increase in the retirement age pauses for birth years 1943 through 1954; the normal retirement age remains age 66. The normal retirement age will continue to rise from age 66 to 67 by two months for each birth year between 1955 and 1960.
  21. Alan L. Gustman and Thomas L. Steinmeier, "The Social Security Retirement Earnings Test, Retirement and Benefit Claiming."
  22. For more on expected present value, see the Appendix.
  23. A beneficiary cannot technically begin receiving benefits before the age of 62 and one month. Thus, the factor applied for early retirement is higher than 75 percent (75.42 percent).
  24. Further, if individuals remain in the labor force, their Average Indexed Monthly Earnings, and subsequently their benefit amount, may increase if their current earnings are among their 35 highest earnings years.
  25. Jonathan Gruber and Peter Orszag, "Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?" suggest that the factors are actuarially fair. Alan Gustman and Thomas Steinmeier, "The Social Security Retirement Earnings Test, Retirement and Benefit Claiming," note that they are more than actuarially fair - that is, the factors encourage early retirement, particularly for individuals with high discount rates.
  26. See Table V.C3 in the 2006 Social Security Trustees Report.
  27. Benefits are reduced for early retirement by 5/9 of one percent for each of the first 36 months before the normal retirement age and then by 5/12 for each month thereafter.
  28. The positive labor supply effects and the consequent revenue effects are not typically scored by the Office of the Chief Actuary in evaluating reform proposals.

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