Volume VI, Number 3
March 20, 2000
The House has voted unanimously to repeal the Social Security "earnings test," which withholds benefits from some working seniors. The measure is due to come up shortly in the Senate, where it enjoys overwhelming support; the President has promised to sign it. There are good reasons to get rid of this outdated and unpopular feature of Social Security. It is complex and costly to administer. It doesn't save any money. And it may encourage some seniors to retire earlier and work less than they otherwise would. But however you look at it, the earnings test is a minor concern. It's too bad that leaders don't show the same enthusiasm for ensuring that Social Security is sustainable for younger Americans tomorrow as they do for grandstanding to the senior lobby today.
No Penalty at All
For all of the fuss about the earnings test, you'd think that it imposed a major penalty on working seniors. While this was once true, it no longer is. In fact, today's earnings test imposes no penalty at all. Under the original Social Security Act, retirees forfeited their entire benefit if they had any labor income. The idea was that Social Security was "insurance" against loss of earnings in old age, and hence should only be collected if workers had entirely withdrawn from paid employment. In the view of many at the time, this strict "earnings" or "retirement" test served another purpose as well: getting the elderly out of the workforce to make room for the young and able. Since then, attitudes have changed-and so has the earnings test. Currently, retirees aged 70 and older are exempt: They can have unlimited earnings with no effect on their benefits. Retirees aged 65 to 69 have a dollar of benefits withheld for every three dollars of earnings above a threshold, which is now $17,000 and is due to rise to $30,000 in 2002. Different (and lower) thresholds apply to early retirees aged 62 to 64. Even this attenuated test is neutralized by another change in Social Security: the addition of a "delayed retirement credit" designed to give beneficiaries the same lifetime benefits no matter when they stop working. The credit returns any monthly benefits withheld before age 70 in the form of higher monthly benefits after age 70. This brings us to the real problem with the earnings test-namely, that it no longer serves a coherent purpose. Why should government withhold money from beneficiaries before age 70 merely to return it to them after age 70? The test is costly to administer, yet results in no appreciable benefit savings. Few seniors, moreover, understand how the delayed retirement credit works, and so some may retire earlier and work less. Repealing the earnings test has a modest near-term cost: $22 billion in the House bill, which would eliminate the test for beneficiaries aged 65 to 69 but leave that for early retirees in place. The long-term cost, however, is negligible. The larger benefits that seniors collect up front will result in smaller benefits later on.
What Really Matters
That said, one has to wonder at Congress' priorities. By 2002, the earnings test will affect only a tiny minority of seniors: roughly 5 percent of beneficiaries aged 65 to 69, according to CBO figures. And this minority will, on average, have earnings of over $60,000. Meanwhile, the retirement security of an entire generation is in peril. Beyond the year 2034, Social Security revenue will be sufficient to pay just 72 cents of every dollar of promised benefits. Long before then, the program's cash deficits will impose a mounting burden on the budget and the economy. This ought to galvanize leaders into action. But here Americans wait in vain for meaningful reform-much less a unanimous vote. A bipartisan group of Senators plans to offer an amendment during the earnings test debate that calls on the Trustees to include a more complete and forthright discussion of Social Security's long-term liabilities in their reports. While that won't solve the problem, it may help refocus Congress on what really matters. FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Robert Bixby