Female labor supply and social security's earnings test

In the past, benefits of social security recipients may have been reduced if they earned too much income.  Since its inception in 1935, social security benefits have been subject to an “earnings test.”  Though the particulars of the law have changed over time, the earnings test taxes labor income and reduce the incentive to work. 

      Before the law was changed in 2000, the earnings test consisted of a lower and upper threshold.  If social security recipients’ wages were less than the lower threshold, their benefits were not reduced.   However, if the retirees’ income was between the lower and upper thresholds, they lost $1 of benefits for every $3 of wages they earned.  Finally, if recipients’ labor income exceeded the upper threshold, they lost all their benefits.  The earnings test was applied to all recipients, those who retired before their normal retirement age (NRA) and those who retired upon or after their NRA.  After 2000, the earnings test was no longer applied to retirees after the month they reached their NRA.

      This paper’s objective is to determine how this policy change affected the labor supply of married and single women of different races over the age of sixty.  If spouses’ wages are no longer taxed after they reach their NRA, household income increases and married women may work less.  If the income of single women is no longer taxed after they reach their NRA, their opportunity cost of leisure increases and they may work more.  Given their increased participation in the labor market, black, female retirees may be more likely to work than white women.

      This paper uses an econometric technique known as the difference-in-differences.  This popular technique quantifies the effect of a policy change on economic behavior.  The data consist of monthly observations from the Current Population Survey.  Possible explanatory variables include the individual’s health, marital status, race, the number of dependents at home, years of education and the duration of unemployment.  Past papers have concentrated on how the earnings test affected male labor supply and they have found mixed results.  The emphasis on female labor supply is one of this paper’s contributions.  Also previous studies on the effects of the policy change in 2000 had relatively few observations after the regime change.  This study has more observations after the regime change and it includes the effects of the Great Recession, adding to the paper’s overall contribution to the literature.