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The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenues

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  • Anthony J. Pellechio

Abstract

In this study the social security earnings test is shown to have a significant effect empirically on the labor supply of retirement aged men. A rich data file from the Social Security Administration containing accurate benefit information provides a cross- section sample of 65-70 year old married men who worked some amount for empirical investigation. The data pertain to 1972. The results indicate that eliminating the earnings test would increase labor supply by 151 annual hours and payroll tax revenue by $31 per individual in the sample. The way in which the earnings test is relaxed is important also. Raising the exempt amount increased labor supply while lowering the tax rate did not. This follows from analyzing labor supply decisions over a nonlinear earnings-tested budget constraint. An econometric technique was developed for consistently estimating labor supply over nonlinear budget constraints. This technique conveniently summarized the budget constraint in an expected value calculation.

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  • Anthony J. Pellechio, 1978. "The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenues," NBER Working Papers 0272, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0272
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    1. Boskin, Michael J. & Hurd, Michael D., 1978. "The effect of social security on early retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 361-377, December.
    2. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, February.
    3. Boskin, Michael J, 1977. "Social Security and Retirement Decisions," Economic Inquiry, Western Economic Association International, vol. 15(1), pages 1-25, January.
    4. Campbell, Colin D & Campbell, Rosemary G, 1976. "Conflicting Views on the Effect of Old-Age and Survivors Insurance on Retirement," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 369-388, September.
    5. Reuben Gronau, 1974. "The Effect of Children on the Housewife's Value of Time," NBER Chapters, in: Economics of the Family: Marriage, Children, and Human Capital, pages 457-490, National Bureau of Economic Research, Inc.
    6. Jacob A. Mincer, 1974. "Schooling and Earnings," NBER Chapters, in: Schooling, Experience, and Earnings, pages 41-63, National Bureau of Economic Research, Inc.
    7. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-694, July.
    8. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
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    Cited by:

    1. Laurence J. Kotlikoff & David A. Wise, 1988. "Pension Backloading, Wage Taxes, and Work Disincentives," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 161-196, National Bureau of Economic Research, Inc.
    2. Richard A. Ippolito, 1983. "Public Policy Towards Private Pensions," Contemporary Economic Policy, Western Economic Association International, vol. 1(3), pages 53-76, April.
    3. Gruber, Jonathan & Orszag, Peter, 2003. "Does the Social Security Earnings Test Affect Labor Supply and Benefits Receipt?," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(4), pages 755-773, December.
    4. André Masson & Denis Kessler & Dominique Strauss-Kahn, 1980. "Système de retraites et épargne des ménages en France," Revue Économique, Programme National Persée, vol. 31(6), pages 1157-1177.

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