Comments on “The Minimum Wage and Incentive for Full-Time Work under the

Social Security Retirement Earnings Test” by Gary Engelhardt & Patrick Purcell 2018 Retirement Research Consortium Annual Conference

Jae Song

The Office of Analytics, Review, and Oversight

Social Security Administration

What’s new in the paper?

• This paper estimates the effects of the RET on the work and earnings of Social Security beneficiaries under the FRA (early retirees). • Most existing studies on the RET focus on those who are at the FRA or older; these

studies exploit a major policy change: the removal of the RET above the FRA in 2000. • There has been no significant policy change for beneficiaries under the FRA other

than 1) gradual increases in the annual exemption amount; 2) gradual increases in the FRA.

• This paper exploits state and year variations in “real effective RET threshold” caused by uneven changes in state-level minimum wage. • The paper estimates the effects of the kinks on extensive & intensive margin labor

supply responses. • Early retirees who are binding at the minimum wage level would adjust hours of

work to avoid the ‘tax’ caused by the RET

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• This paper uses individual-level pooled cross-section sample from CPS (1982-2016). • Estimates effects on hours of work and employment using a sample of 64-

year-old beneficiaries

• The authors use 64-year-old non-beneficiaries as the placebo sample.

• Key findings include: • The RET has ‘economically large impacts’ on the earnings and employment of

Social Security early beneficiaries

• The RET has asymmetric labor supply effects around full-time and full-year hours.

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Comment One: On estimation

• Basic equation:

• It decomposes the RET annual threshold into two parts: 1) min wage; and 2) hours needed to reach the threshold at the minimum wage level. • A similar specification is often used to study the effects of minimum wage on the labor

supply of young adults. • The authors report estimates of 𝛄; readers would like to see the estimates of 𝛃 as well.

• Is variation in the hour corresponding to the RET threshold potentially confounded with other employment changes and/or time trends? • The authors control for state-specific economic shocks by including state-specific

unemployment rates & wage structure. • Shouldn’t a time trend be included as well?

min min

ist st st ist s t st isth w h u ψX , (1)

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Comment One: On estimation

• Estimates reported in the paper represent the aggregated effects of 64-year-old beneficiaries. • The effects of the test may vary across age group. The effects could be larger/smaller with

those who claim benefits at the ERA than with those who claim benefits close to the FRA. • There could be different labor supply effects for pre-2000 and post-2000 period.

• It estimates rather short-run effects. • With the labor market friction, forward-looking individuals would adjust their labor supply in

an anticipation of the RET. • Can lagged values be included to tease out long-run and short-run effects as done in previous

studies? • Then including lag values alone is not sufficient enough to do that.

• The authors’ specification test: unable to reject H0 (βben= βnon-ben). • Unable to reject the null perhaps due to errors in the samples. The sample error could

generate the observed sample effects rather than the true effects.

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Comment Two: On “the sample of beneficiaries is exogenous” • Pooled cross-sectional data:

• The estimation sample – 64-year-old beneficiaries (11,473 obs, 1983-2016);

• The placebo sample – 64-year-old nonbeneficiaries (10,837 obs, 1983-2016)

• The authors test the assumption by correlating the log of relative hazard (or cumulative hazard) on a set of covariates using a sample from the HRS.

• Alternatively, can a regression model with a binary dependent variable be fitted using data from the CPS? • Odds or Hazard rates?

• Indicator of entitlement or time to entitlement?

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Comment Three: On alternative data sources

• In the current study, beneficiary/non-beneficiary status depends on whether or not an individual receives Social Security income.

• This definition could be problematic: • Consider a retiree who worked above the exemption amount and his entire annual benefits

were withheld. His Social Security income could be reported in the CPS as zero. Hence he would be considered as non-beneficiary.

• Disability beneficiaries are not subject to the RET. Under the authors’ definition, they could be considered to be beneficiaries.

• Retirement Earning Test rules are ‘precise’. • Need to know birth year and month, the year and month that benefits were entitled

(claimed), and benefit amounts. • The month of birth, (exact) benefit entitlement status are not available in the CPS.

• SIPP matched data? • Advantages: Longitudinal earnings; date of birth; benefit entitlement date; benefit amounts,

presence of spousal beneficiary.

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Comment Four: On exploiting other aspects of the RET • Asymmetric effect of work by a primary worker and his spouse on benefit reductions:

• Spousal benefits can be reduced not only by excess earnings of the spouse, but also by excess earnings of the primary worker.

• A primary worker’s benefits can be reduced by the primary worker’s excess earnings, but not by the spouse’s excess earnings.

• Special rule for the first year of entitlement. • Monthly earnings test applies: the monthly earnings will be tested by comparing to the monthly

exempt amount (= annual amount/12).

• There are two different exempt amounts and two different withholding rates: • Beneficiaries who are attaining the FRA during the year: Higher threshold amount ($44,800 in

2017) and lower withholding rate ($1 for every $3 above the higher threshold ) • Beneficiaries who are not attaining the FRA: lower threshold amount ($16,920 in 2017) and high

withholding rate (is $1 for every $2 above the lower threshold. • For the test purpose, the higher amount applies only to earnings made in months prior to the

month attaining the FRA.

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Conclusions

• Exploiting the Interaction of RET thresholds and minimum wage is a fresh, new idea

• ‘Accurate’ data on beneficiary status, annual earning amounts, and date of birth are particularly important in estimating the effect of RET on labor supply. Perhaps, consider using other data sources, e.g., SIPP matched data

• The effects of the test may vary across age groups: the effects could be larger/smaller with those who claim benefits at the ERA than with those who claim benefits close to the FRA.

• Does the RET affect benefit claiming? If so, by how much? % Distribution by age at entitlement, OASDI worker benefit awards in 2016

• Some additional discussions related with the RET: 1) distributional effects; 2) consumption smoothing; 3) welfare implications.

62 63-FRA FRA FRA+ DI Conv.

men 31.9% 22.4% 17.9% 10.3% 17.4%

women 36.9% 23.7% 12.6% 10.4% 16.5%

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