The Social Security Earnings Limit Provision


Mr. Chairman, I am honored to have the opportunity to discussthe issue of reforming the Social Security earnings test.

The Social Security earnings test provision is anti-work,anti-senior citizen, and anti‐​tax fairness. The earnings testshould not be reformed; it should be repealed. Its major effect isto impose punitive tax rates on senior citizens thus driving themout of the labor force altogether, or to reduce their hoursworked.

If the Social Security earnings test cannot be repealed, then weshould minimize the damage of this policy by raising the incomethreshold as in the Republican contract, and by lowering the amountof lost benefits for each dollar earned. Currently, the earningstest leads to a 33 cents in lost benefits for each additionaldollar earned; that should be lowered to 20 cents.

Given the trend of an aging workforce in America, such anti‐​workpolicies are becoming increasingly economically unaffordable.

Indeed, although reforms in the Social Security earnings testare opposed by some on the grounds that these tax changes wouldinjure the financial status of the Social Security system, thetruth is that unless ways are found to keep healthy and productivesenior citizens in the workforce and off of this and other benefitprograms, Social Security will be financially insolvent when thebaby boom generation reaches retirement age. In any case, even ifone assumes that the Congressional Budget Office static scoring iscorrect – which I believe it is not – and the GOP earnings testprovision loses $7 billion over five years, that could be paid foreasily with reforms in Social Security that must be made in anycase.

One of the most troubling economic trends in America is thatAmerican workers have been retiring from the labor force at earlierand earlier ages. This trend has occurred over the past 30 yearsand is shown in the attached Table 1. It shows that in 1963 only 20percent of American men aged 62 or over were retired; today thatpercentage is nearly 50 percent. At age 65, less than half ofAmerican men were retired in 1963, today, three‐​quarters of all menare retired.

It is true that these earlier retirement ages are in part afunction of an increasingly wealthy society where individualworkers with higher living standards begin to prefer more leisureover more work. The trend is also a function of private pensionpolicies and private sector retirement rules. But there is noquestion that Social Security has played a substantial role inencouraging retirement from the workforce. The big spikes inretirement by age occur when people reach of 62, i.e. when theybecome eligible for early retirement under Social Security, and atage 65, when they become eligible for full benefits under SocialSecurity.

One reason this trend is troubling from an economic standpointis that over this same time period, life expectancy has risensubstantially. In 1960 life expectancy was 70. Today, it is 76.Life expectancy could easily reach 80 over the next thirty years.Moreover, life expectancy for those who reach the age of 65 today,is about 83. In other words, the average person who goes on SocialSecurity collects government benefits for 18 — 20 years.

This combination of earlier retirement, longer life spans, andthe aging of the baby boom cohort, is leading America head‐​ontoward a financial trainwreck of spectacular proportions. The ratioof workers to retirees in America has dropped from 15 to 1 in 1950;to 3 to 1 today; to 2 to 1 by 2025. (See Table 2) No nation canprosper under such demographic conditions. The wagon will becometoo heavy to pull. To the extent we can adopt policies that canentice healthy and productive senior citizens to prolong their workyears, we in a sense take that person out of the wagon and createan additional hand to help pull.

Skeptics of repealing or reforming the earnings test contendthat the current policy does not deter senior citizens fromworking. Evidence from tax rate reductions in the 1960s and 1980ssuggest otherwise. Both the Kennedy and Reagan supply side tax ratereductions had a significantly positive impact on work effort. Muchof the literature on this subject is covered in Larry Lindsey’sbook The Growth Experiment. What is especially interesting andrelevant about the economic literature on labor market responses tochanges in tax rates is that it is women and the elderly who areamong the most responsive to changes in tax policy.

* An Urban Institute study by Robert Haveman found that “persons62 and over” had “high responsiveness to changes in workincentives” after the Reagan tax cuts. (See: Robert Haveman, “HowMuch Have the Reagan Administration’s Tax and Spending PoliciesIncreased Work Effort?” in Charles L. Hulten and Isabel Sawhill,The Legacy of Reaganomics, Urban Institute, 1984)

* A Brookings Institute study on retirement and earnings datafrom 1969 – 79 concluded: “The elimination of the [earnings] test isestimated to raise the work effort of average retirees over age 62by 30 to 40 percent.” (See: Gary Burtless and Robert A. Moffitt,“The Effect of Social Security Benefits on the Labor Supply of theAged,” in Henry Aaron and Gary Burtless, Retirement and EconomicBehavior, Brookings Institution, 1984)

* Economists Stanley Masters and Irwin Garfinkel find that theelderly’s work patterns are influenced by government benefitlevels. (See: Stanley Masters and Irwin Garfinkel, Estimating theLabor Supply of Income Maintenance Programs, New York, AcademicPress, 1977)

Perhaps the most compelling evidence that senior citizens’ workeffort changes in response to Social Security policies is that thiswas one of the intentions of the program in the first place. Anexplicit goal of Social Security when it was originally conceivedby Franklin Roosevelt in the early 1930s was to drive the elderlyout of the workforce. Social Security was passed in 1935 during anera of high unemployment and widespread Keynesian economicilliteracy in Washington where policymakers believed that the wayto create more jobs and prosperity was to have less people working.Senator Robert Wagner, the original chief sponsor of the SocialSecurity Act advised his colleagues to voter the bill because “theincentive to the retirement of elderly workers will improveefficiency standards, [and] make new places for the strong and theeager.”

The Social Security earnings test was invented to serve as afinancial punishment to senior citizens who chose to continue towork beyond the age of 65 rather than freeing up jobs for youngerworkers. The very first income limit was set at $15 per year.

The United States can no longer afford policies based oneconomic illiteracy. Today, we need to adopt policies thatencourage senior citizens to work, or at least, which do not pushthem involuntarily into retirement. And we need to do so with asense of urgency. Along these lines, Congress should:

1) Allow workers to gradually opt‐​out of Social Security througha Super‐​IRA approach and corresponding reduction in payroll taxes.This would allow workers to manage their retirement earnings andpensions to match their individual choices.

2) Gradually raise the retirement age and early retirement agefor Social Security by four months per year until early retirementage reaches 66 and normal retirement 70.

3) Reduce benefits for those choosing early retirement.

4) Repeal the 1993 increase in the tax on Social Securitybenefits;

5) Alter the delayed retirement credit to encourage laterretirement and allow the credit to be expanded past the age of70;

6) Repeal the earnings test.

Even if the earnings test cannot be repealed, the reformproposed in the Republican contract is not, in my opinion, the bestway to reform this onerous law. Rather than, or in addition to,raising the income threshold, the best way to reduce the perverseincentives of the Social Security earnings test would be to reduceits marginal impact on all working – or potentially working – seniorcitizens. This could be accomplished by changing the income testformula. Currently, that formula is $1 of lost benefits for every$3 of earnings. This should be changed to $1 of lost benefits forevery $5 of earnings. This reduces the increased marginal tax rateon senior citizens as a result of the earnings test from 33 to 20percent.

In 1989 then‐​Senator Lloyd Bentsen proposed changing the formulato $1 of lost benefit for every $4 of earnings. Certainly this newreformist Congress can be at least as bold as Bill Clinton’s firstTreasury Secretary.

Paying for these changes should not deter immediate action. Theearnings test changes under consideration could be paid for byraising of the retirement age by four months per year asrecommended above. This is a change that Congress should do as amatter of essential Social Security reform in any case.

The elderly have been called the people that the supply siderevolution forgot. Today, we impose unfair – even punitive – taxrates on our senior citizens today to discourage them from working.The earnings test is particularly offensive because it is only atax on work – not on unearned income. When all of the existingfederal and state income taxes are combined with the specialearnings taxes imposed on the elderly today, marginal tax rates forthese Americans often reach 60, 70 and even 80 percent. Once upon atime, the nation could afford such economic folly. That time haslong passed.

                       TABLE 1       Percentage of Men Aged 55-70 in Retirement        1963         1970      198560       12           16        2961       16           19        34 62       20           26        4963       24           31        55 64       28           36        5865       46           50        7066       57           55        7467       61           61        7668       67           62        8069       67           66        8070       73           70        84Source: Rita Ricardo-Campbell and Edward P. Lazear, Issues inContemporary Retirement (Stanford: Hoover Institution, 1989. Based on Bureau of Labor Statistics data.                   TABLE 2The Growing Dependency Crisis of Social Security             Workers Per Social Security Recipient    1950          161993           32025 est.      22040 est.    1.82070 est.    1.3Source: Social Security Trustees Report, 1993.

Stephen Moore

Subcommittee on Social Security
Committee on Ways and Means
United States House of Representatives