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

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.