NCPA - National Center for Policy Analysis

Second Earnings Test Merits Second Look

November 18, 1999

Several policymakers are eager to repeal the social security earnings test, which reduces social security benefits by $1 for every $3 earned above $15,500 for retirees between the ages of 65 and 69. Those favoring repeal are looking for ways to encourage people to stay in the labor market by easing the disincentive associated with the original earnings test.

Urban Institute experts point out that another earnings test is not being addressed by policymakers, which will make their efforts towards reform futile.

  • In 1960, a second earnings test was developed for those who retired at age 62, reducing benefits for early retirees by $1 for every $2 of earnings above a threshold -- currently $9,600 a year.
  • Some 80 percent of retirees file for benefits before reaching age 65.
  • Other reforms, like increasing the retirement age from 65 to 67 by 2027, will increase the number of retirees affected by the second earnings test.

The earnings limit for the original test is set to increase to $30,000 by 2002. But if the second test's lower earnings threshold and higher benefit reduction persuade retirees to sever ties with the labor market in their early retirement years, enticing them back with a more lenient earnings test once they turn 65 will be difficult.

Source: Eugene Steuerle and Christopher Spiro, "Are Policymakers Overlooking a Second Earnings Test?" Straight Talk on Social Security and Retirement Policy No. 9, October 15, 1999, Urban Institute, 2100 M. Street, N.W., Washington, D.C. 20037, (202) 261-5687.


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