Early Retirement, Labor Supply, and Benefit Withholding: The Role of the Social Security Earnings Test

Abstract

The labor supply and benefit claiming incentives provided by the early retirement rules of the Social Security Old Age benefits program are of growing importance as the Normal Retirement Age (NRA) increases to 67, the labor force participation of Older Americans rises, and a variety of reforms to the Social Security system are considered. Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor. We describe these incentives, and analyze benefit withholding patterns using data from the Master Beneficiary Files of the Social Security Administration, and present descriptive and exploratory evidence on the determinants of benefit withholding using data from the Health and Retirement Survey. We then investigate the importance of the Earnings Test limits for work and claiming behavior using a dynamic life-cycle model of labor supply, benefit claiming, and withholding. We use the latter framework to compare the consequences of a number of changes to the Earnings Test provision for the labor supply behavior and earnings of older Americans.