The Social Security Retirement Earnings Test, Retirement and Benefit Claiming

Published: 2004


This paper introduces the age at which Social Security benefits are claimed as an additional outcome in a structural model of retirement and wealth. The model is then used to simulate the effects of abolishing the remainder of the Social Security earnings test, between age 62 and the full retirement age. Estimates are based on data for married men from the first six waves of the Health and Retirement Study. From age 62 through full retirement age, the earnings test reduces the share working full time by about four percent of the married male population, which entails a reduction of about ten percent in the number of married males of that age at full time work. However, abolishing the earnings test would adversely affect the cash-flow of the system. If the earnings test were abolished between early and full retirement age, the share of married men claiming Social Security benefits would increase by about 10 percentage points, and average benefit payments would increase by about $1,800 per recipient, to be offset eventually by actuarially fair or better than fair reductions in benefit payouts throughout their 70s, 80s and 90s. One can increase the employment of older persons either by abolishing the earnings test or by increasing the early entitlement age under Social Security. A major difference on the funding side is that abolishing the earning test results in an earlier flow of benefit payments from Social Security, worsening the cash-flow problems of the system, while increasing the early entitlement age delays the flow of benefit payments from the system, improving its liquidity.

Key Findings