Using Nonlinear Budget Sets to Estimate Extensive Margin Responses: Method and Evidence from the Earnings Test

We estimate the impact of the Social Security Annual Earnings Test (AET) on older workers’ employment. The AET reduces social security claimants’ current benefits in proportion to their earnings in excess of an exempt amount. Using a regression kink design and Social Security Administration data, we document that the discontinuous change in the benefit reduction rate at the exempt amount causes a corresponding change in the slope of the employment rate, suggesting that the extensive margin of labor supply is more sensitive to this policy than commonly thought. We develop a model and method that allow us to translate the behavioral responses into a lower bound estimate of 0.49 for the extensive margin elasticity, which implies more than a 1 percentage point increase in work in the absence of the AET. (JEL H55, J14, J22, J26, J31)

The Anticipation Effect of the Earnings Test Reform on Younger Cohorts

The Social Security earnings test reform in 2000 eliminated the earnings test for all individuals between the normal retirement age (NRA) and age sixty-nine. The earnings test has long been accused of imposing a disincentive on the labor supply among older workers. In this article, we argue that the policy change may also have affected the labor supply among people who were just below the NRA around 2000. We utilize approaches embedded with a difference-in-differences design to estimate the anticipation effect on the labor supply of the slightly younger group (aged sixty-two to sixty-four) using an even younger cohort as the control group. Our preferred estimates indicate that the cohort aged sixty-two to sixty-four had worked 5.4 percent more weeks per year and 5.1 percent more hours per week after the earnings test reform in 2000.

Estimating Adjustment Frictions Using Nonlinear Budget Sets: Method and Evidence from the Earnings Test

We introduce a method for estimating the cost of adjusting earnings, as well as the earnings elasticity with respect to the net-of-tax share. Our method uses information on bunching in the earnings distribution at convex budget set kinks before and after policy-induced changes in the magnitude of the kinks: the larger is the adjustment cost, the smaller is the absolute change in bunching from before to after the policy change. In the context of the Social Security Earnings Test, our results demonstrate that the short-run impact of changes in the effective marginal tax rate can be substantially attenuated. (JEL H24, H31, H55, J22, J31)

Improving understanding of the retirement earnings test

This paper presents results from an online experiment that tested the effect of simple, concise information on respondents' knowledge of the rules of Social Security's Retirement Earnings Test (RET). We find that a straightforward, simple information treatment has a large effect on knowledge of the RET and on prospective choices regarding working and claiming benefits. We tested two additional information treatments that provided more comprehensive information and used illustrative examples. One of the additional treatments used only text, while the other one included a visual tool. Our results suggest that the additional treatments did not further improve knowledge; the simplest intervention yielded the same effect as the more comprehensive ones.