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)

Pension reform and return-to-work policies

For many people, working after beginning retirement benefit collection is a way to enhance financial security by increasing income. Existing research has shown that retirees are sensitive to the Social Security earnings test, which restricts the amount of earnings some beneficiaries can receive. However, little is known about the effects of other types of policies on post-retirement employment. Instead of restricting earnings, many public pension plans restrict the number of hours beneficiaries can work. I use return-to-work rules limiting the number of hours of employment in a state's public pension plan and administrative data on employment and retirement to determine the rules’ effects on retirement decisions and post-retirement labor supply. I find that the increases in the maximum number of hours of post-retirement employment lead to no change in retirement benefit collection and to increases in part-time work among retirees. As such, these policies appear to be binding on the labor supply decisions of some employees. These results are relevant for designing policies aimed at extending work-lives or improving the health of pension systems.