Essays on the Impact of Social Security on the Retirement Decision

Abstract

This dissertation investigates the impact of Social Security on the retirement decision. In the first half of the dissertation, I investigate the impact of the repeal of the Retirement Earnings Test (RET) for 65-to-69-year olds on the labor supply of older men. Under the RET, Social Security benefits are taxed if earnings exceed a stipulated amount. Using life tables from the National Vital Statistics Report, I first demonstrate that for white males, in expected value, the RET acts as a tax on beneficiary earnings. Thus, the repeal of the RET is effectively a tax cut for 65-to-69-year-old men.

Using data from the Outgoing Rotation Groups of the CPS, I estimate the effect of the repeal of the RET on the labor supply of older workers aged 55-75 years. In a life-cycle context, younger workers (55-to-64-year-olds) are expected to reduce labor supply, while workers in the age group targeted by the repeal (65-to-69-year-olds) should choose to increase labor supply.

The empirical results suggest that older workers work more because of an effective income tax cut, while younger workers reduce their labor supply. Further, the increased labor supply among older workers stems primarily from older workers staying in the labor force longer rather than from older workers re-entering the labor force.

In the second half of the dissertation, I use data from the 1970 and 1980 Censuses and a reduced form model to examine joint retirement decisions in a household. The eligibility criteria for Social Security produce peaks in retirement at ages 62 and 65. Moreover, the retirement of one's spouse can also affect one's labor supply because of income pooling within the family or complementarities in leisure.

I find that the spouse's turning 62 and 65 affect one's own exit from the labor force. To test whether leisure complementarities are the reason for those cross effects, I use protection from age discrimination as an instrument for wages and find that, while own coverage by age discrimination laws sometimes increases own labor supply, spousal coverage has no effect. This finding suggests that the linkages in labor supply among spouses do not stem from leisure complementarities.