The Labor Supply Effects of the Social Security Earnings Test

Leora Friedberg

No 7200, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H55 J14 (search for similar items in EconPapers)
Date: 1999-06
New Economics Papers: this item is included in nep-lab and nep-ltv
Note: AG PE
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Citations: View citations in EconPapers (13)

Published as Review of Economics and Statistics, Vol. 82, no. 1 (February 2000): 48-63.

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