Did falling Social Security benefits generate higher labor force participation?

I spotted this story yesterday, reporting on a new study by David Blau of Ohio State and Ryan Goodstein of the Federal Deposit Insurance Corporation that argues that the decline in Social Security benefits – driven by increases in the Full Retirement Age from 65 to 66 – was a big part of why we've seen a rebound in labor force participation by men in recent years. The study concludes:

Since the early 1980s, Social Security rule changes have favored increased LFP. The rise in the [Delayed Retirement Credit] and the [Full Retirement Age] are estimated to account for one quarter to one half of the increase in LFP of older men since the 1980s. This amounts to a 1.2 to 2.4 percentage point increase in the LFPR of men aged 55-69. Rising LFP of married women and changes in the educational composition of the older male population contributed to the increase as well.

I'll admit I haven't read the study carefully yet, so these are my initial thoughts, which may well be wrong: I'm not sure why an increase in the DRC, which raises benefits for those who delay claiming after the Full Retirement Age, would necessarily increase labor force participation since there is no long a retirement earnings test for individuals beyond the FRA who claim benefits while continuing to work. It might, to the degree that claiming benefits and leaving the workforce are treated as a joint decision, but if they are treated separately then it may not. I'm also not convinced most people have any idea how delayed retirement credits work, which obviously would mute any response.

An increase in the Full Retirement Age can raise labor force participation in two ways. Directly, a rise in the retirement age is effectively a reduction in benefits, and if benefits are reduced people will tend to work a little longer to make up the difference. (That's one reason why I favor solvency based on reduced benefits rather than higher taxes, which would tend to encourage people to work a little less.) But second, the FRA acts as a signal that many will treat as the "correct" time to retire. As the retirement age increases, people's claiming behavior appears to rise as well.

This paper by my former SSA colleagues Joyce Manchester and Jae Song covers some similar ground and is worth checking out.

Read more!

Video from recent AEI conference, "Keeping Granny On the Job."

I've managed to embed video of the recent AEI event at which Estelle James and I discussed incentives to delay retirement in the U.S. and Chile. Take a look.

Read more!

Barron’s: The Myth of 2016

Barron's Gene Epstein argues that rising labor force participation by older workers will put off Social Security's insolvency:

Last month, the media flashed the latest grim news on Social Security: Its trustees had concluded that the money pouring out of the system will start exceeding the tax dollars flowing in by 2016, a year earlier than previously forecast. Unreported, however, was a curious fact: The calculations effectively deny the existence of a longtime trend that probably will delay the arrival of Social Security's doomsday. That trend is Americans' growing propensity to work beyond traditional retirement age. In doing this, the agency could be making a $200 billion mistake in its assessment of Social Security revenue over the next 10 years. That sum is the likely unanticipated income from payroll taxes levied on older workers who remain on the job, based on the projections of demographer Peter Francese, who has had an excellent record predicting such trends. A hundred billion here, a hundred billion there, and pretty soon you're talking real money -- enough to keep this system in the black until at least 2018. While such a delay might not sound too impressive, it does give Washington two more years to come up with a viable solution for the nation's most sacred entitlement program.

The full text of the article seems to be available here. Here's the author talking about his article on video:

Overall, I suspect that Epstein may be overestimating increases in labor force participation by older workers and underestimating the degree to which the Trustees already include data on the current upsurge in work by older Americans. In any case, even Epstein isn't arguing that this will cause a significant delay in Social Security's coming deficits.

The issue of labor force participation by older individuals came up during the deliberations of the 2007 Technical Panel on Assumptions and Methods. As I recall, many on the panel argued that labor force participation by older workers would rise, such that over 75 years the labor force participation rate of people in their late 60s would rise to that of folks in their early 60s today, but I don't believe the panel as a whole made such a recommended change in assumptions. In any case, the increases Epstein is arguing for go well beyond this.

Read more!