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Labor Force Attachment Beyond Normal Retirement Age

It is essential to understand the labor supply incentives generated by the Social Security (SS) system to Americans beyond normal retirement age, currently 66, since the U.S. population is growing older steadily and the fiscal burden of SS is sizable. This paper analyzes the joint determination of labor supply, consumption (savings) and the decision to apply for SS benefits of elderly single males, using a dynamic programming formulation and restricted data from the Health and Retirement Study. The focus is on the participation decision rather than the retirement decision because a significant portion of the elderly return to work after being nonparticipants for a while. The model accounts for this through wage, health status and health expenses shocks. Undertaking a counterfactual analysis, I find that the year 2000 SS amendment abolishing the "earnings test" for the age group 66âˆ’70 explains one-fourth of the recent increase in the elderly labor force participation rate (LFPR). Applying the "earnings test" to my post2000 sample decreases LFPR by 3.5 percentage points and mean hours worked by 117 hours at this age group. I further find via counterfactual analyses that the elderly labor supply decision is sensitive to changes in SS benefit and payroll tax amounts on the extensive margin, but the eects on the intensive margin are not substantial. Decreasing SS benefits by 20 percent increases the participation rate of the elderly aged 66 âˆ’ 75 by 37 percent. Because a change in the payroll tax rate is effectively a change in the wage rate, I estimate labor supply elasticities for the elderly and find that the elasticities are around unit elasticity