NBER Digest: Changes in Social Security Rules Affect Retirement Choices

The NBER Digest summarizes a recent paper by Al Gustman (Darmouth) and Tom Steinmeir (Texas Tech) on how changes to Social Security benefit rules have affected retirement behavior:

Changes in Social Security Have Affected Retirement

Social Security rules changes increased full-time work by married men aged 65 to 67 by about 9 percent between 1992 and 2004, encouraged later retirement, promoted the return to full-time work after retiring, and facilitated working part-time after retirement.

In How Changes in Social Security Affect Recent Retirement Trends (NBER Working Paper No. 14105), co-authors Alan Gustman and Thomas Steinmeier find that changes in Social Security rules have changed the shape of retirement. Rule changes increased full-time work by married men aged 65 to 67 by about 9 percent between 1992 and 2004, encouraged later retirement, promoted the return to full-time work after retiring, and facilitated working part-time after retirement. All in all, they account for about one sixth of the increase in labor force participation by 65 to 67 year old married men between 1998 and 2004.

One of the main reasons for enacting the 1983 Social Security reforms in the United States was to increase the labor force participation rate of older workers. In 2000, Congress further expanded work incentives by abolishing the Social Security earnings test for people over the normal retirement age. As a consequence, in 2004 more men over age 65 were working than in earlier years. Overall, between 1998 and 2004 there was a 3.1 percentage point decline in the fraction of 65-to-67-year-old men who were completely retired.

But the experience of younger men was different. Labor force participation rates declined for men aged 50 to 56. And, more men were retired at younger ages in 2004 than in previous years. In 1998, 80.4 percent of men 50 to 56 years old worked full-time. By 2004, only 75.5 percent did so.

To isolate the effect of Social Security rule changes from other factors -- such as the abolition of mandatory retirement ages, changes in employment and compensation policies, rising incomes encouraging early retirement, the stock market boom, and the rising labor force participation rates of women -- the authors estimate a retirement model using Health and Retirement Survey data on 2,231 married men. They then simulate the effects of evolving Social Security rules, assuming that each individual has the work history actually experienced. Individual time preference rates are varied, so that some people respond strongly to delayed incentives and others respond only to incentives that affect current consumption.

The baseline model's estimates suggest that the value of retirement leisure is increasing by 5.4 percent per year, a relatively low value, suggesting that economic incentives can change work effort in retirement. Poor health increases the value of retirement leisure by approximately the same amount as being seven years older, and individuals may change their perception of retirement after they experience it, with some deciding to go back to work. The simulation results further suggest that differences in Social Security rules have no effect prior to age 62. This means that the decline in labor force participation observed for those in their fifties has another cause.

-- Linda Gorman