NCPA - National Center for Policy Analysis

Clinton Calls For Eliminating Earnings Test

February 3, 1999

In his State of the Union Address President Clinton said, "We should eliminate the limits on what seniors on Social Security can earn." This "earnings test" penalizes those receiving Social Security retirement benefits for earning income (wages and salaries) over a specified amount.

  • Today, a retiree age 65 to 69 can earn as much as $15,500 per year or $1,291.67 per month without losing any Social Security benefits.
  • But any earnings greater than this reduces benefits by $1 for every $3 earned -- an additional tax on wage income of 33 percent.
  • For 62 to 64 year-old retirees, however, the penalty is more severe: they lose $1 for every $2 above $9,360 per year or $780 per month -- for a 50 percent added tax rate.
  • Retirees age 70 or older may earn an unlimited amount with no loss of benefits.

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.

This is a major reason why in 1997 only 17.1 percent of men age 65 and older were in the labor force. 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.

Many retirees would work if they could also receive full Social Security benefits. Economist Leora Friedberg of the University of California - San Diego found that eliminating the earnings test would increase the aggregate U.S. labor supply by 5.3 percent.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 3, 1999.

 

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