Modeling behavioral responses to eliminating the retirement earnings test.

Abstract

The retirement earnings test (RET) is an often-misunderstood aspect of the Social Security program. Proposed RET reforms meant to encourage working at older ages could also cause earlier benefit claiming. We use Modeling Income in the Near Term data to analyze the complete repeal of the earnings test for beneficiaries aged 60 or older, first assuming no behavioral responses to repeal and secondly assuming changes to benefit claiming and workforce participation behaviors. We find that beneficiaries affected by RET repeal would generally receive significantly higher benefits when they are younger than the full retirement age (FRA), and somewhat lower benefits after reaching FRA. RET repeal would not significantly change individuals' lifetime benefits and we find no significant changes in the overall poverty rate under either scenario. We find that assumed behavioral responses-particularly the benefit claiming change--have a bigger effect on lifetime benefits than the RET policy change itself.