The Impact of Repealing the Retirement Earnings Test on Rates of Poverty

This article summarizes an analysis ofthe poverty implications of repealing the retirement earnings test (RET). Repealing the RET at the normal retirement age or older is unlikely to generate large poverty effects. Removing the test at age 62 or older, however would possibly lead to large increases in poverty. Summary and Introduction On April 7, 2000, President Clinton signed into law the Senior Citizens' Freedom to Work Act of 2000 (Public Law 106-182). Specifically, it: Eliminates the Social Security retirement earnings test (RET) in and after the month in which a person reaches the normal retirement age (NRA)---currently age 65. That change is in effect for taxable years ending after December 31, 1999. Applies permanently the earnings limit for those at the NRA through age 69 ($17,000 in 2000; $25,000 in 2001; and $30,000 in 2002) and the corresponding reduction rate ($1 for $3 offset) to all months before beneficiaries reach the NRA in the calendar year in which they do so. Permits retired workers to earn a delayed retirement credit for any month for which they request that benefits not be paid even though they are already on the benefit rolls. That provision is in effect beginning with the month in which the beneficiary reaches the NRA and ending with the month before the beneficiary turns 70. The Commissioner of Social Security was in favor of the legislation. It repealed the RET for beneficiaries at the NRA or older but not for beneficiaries aged 62-64. He based his decision partly on the findings of the study below, which shows minimal poverty effects if the RET were repealed at the NRA through age 69 but significant poverty effects from repealing it for those below the NRA. Using matched data from the U.S. Census Bureau's 1994 Current Population Survey and the Social Security Administration's Master Beneficiary Record, the study examines the potential changes in individual income and the number of people in poverty that could have resulted for beneficiaries if the RET had previously been repealed at either the NRA or at age 62. Since the study was conducted prior to enactment of the law, many of the descriptions and examples used here apply to how the RET worked prior to enactment. In general, the earlier people file for Social Security benefits the lower their monthly benefits will be. Eliminating the RET might lead some individuals to file for Social Security benefits at an earlier age than they otherwise might, which could reduce individual incomes and increase the number of people in poverty. The study finds that even if individuals accelerated their filing for Social Security benefits as a result of eliminating the RET at the NRA, the number of people below the poverty line would change little if at all. However, if the RET was eliminated at age 62 and individuals accelerated their filing for Social Security benefits, the number of people below the poverty line would increase. This analysis provides a range of estimates for the impact that eliminating the RET would have on rates of poverty. Specifically, this article: * Explains how the RET worked before enactment of the Senior Citizens' Freedom to Work Act of 2000, * Describes the approach used to estimate the poverty effects of repealing the RET, * Estimates the impact on poverty rates of repealing the RET at the NRA and at 62, and * Provides detailed demographic profiles of the population likely to become poor if the RET at age 62 were eliminated. The Retirement Earnings Test The Social Security Act of 1935 specified that beneficiaries would lose all of their benefits if they had any earnings. Over the years, however, Congress has eased the RET's restrictions (allowing beneficiaries to supplement their benefits with earnings) by increasing the amount of exempted earnings, reducing the age of exempted beneficiaries, and liberalizing the formulas for reducing benefits. …