Working Paper: NBER ID: w7200
Authors: Leora Friedberg
Abstract: The Social Security earnings test reduces benefits at a 33-50% rate once earnings pass a threshold amount - among the highest marginal tax rates in the economy. Previous research dismissed the importance of the earnings test but failed to take advantage of three changes in the earnings test rules in order to identify its impact. Each change applied to some age groups and not others - which make them useful for identifying the effect of tax rules on the labor supply of working beneficiaries. Beneficiaries in the Current Population Survey satisfy the strongest prediction: many keep their earnings just below the exempt amount, and this bunching shifts with the earnings test rule changes. The rule changes are then incorporated into an econometric model of labor supply to identify income and substitution elasticities. The resulting elasticity estimates suggest considerable deadweight loss suffered by working beneficiaries. Simulations predict a substantial boost to labor supply from eliminating the earnings test, and at a minimal fiscal cost. However, a slight decrease in labor supply is predicted from the recently legislated increase in the exempt amount.
Keywords: No keywords provided
JEL Codes: H55; J14; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social Security earnings test rules (H55) | labor supply (J20) |
| earnings test (H55) | disincentive for older workers (J26) |
| earnings test (H55) | bunching behavior (C92) |
| changes in earnings test rules (H55) | bunching behavior (C92) |
| earnings test (H55) | deadweight loss for working beneficiaries (J32) |
| increase in exempt amount to $30,000 (H26) | labor supply (J20) |