Social Security: Proposed Changes to the Earnings Test Page: 4 of 6
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as inconsistent with other federal policies, and contrary to the recommendations of
gerontologists and others concerned with the health of the elderly, that strive to increase
hiring and retention of older workers. Even if on a purely economic basis the penalty the
test imposes is not high enough to support a rational decision to not work, opponents
argue that the test creates a psychological barrier that dampens the desire to work.
The disincentive effect is magnified when viewed on an after-tax basis. The
beneficiary who works loses not only 50% or 33% of his or her benefit above the exempt
amount due to the earnings test; he or she must pay Social Security taxes and probably
Federal and State income taxes as well. The result can be a high effective marginal tax
rate, exceeding 100% in extreme cases. One result of this disincentive is that some seek
lower paying or part-time work to limit their earnings, and thus do not employ the full
value of their skills that could enhance the nation's productivity and economic output.
Another can be to encourage being paid "under the table."
Critics of the test maintain that it discriminates against younger retirees who must
work to supplement their benefits. Others who have alternative forms of income such as
private pensions can still receive full benefits. If an individual receives a fairly small
Social Security benefit that he must supplement through work, some consider it unfair to
reduce that benefit once he earns more than what critics see as modest amounts - only
$11,520 a year for those under the full retirement age. They sometimes state the question
another way: why should income from investment be treated more favorably than that
from earnings, especially since most investment income is received by upper-income
persons who also usually have higher Social Security benefits? Thus, it is claimed that
the earnings test is inequitable to persons who need additional income in retirement.
Furthermore, critics say that in addition to being complicated and difficult for the
individual to understand, the test is complex and costly to administer. For example,
before enactment of P.L. 106-182, it was responsible for more than one-half of retirement
and survivor program overpayments. Elimination of the test would thus hold down
administrative expenses, and recipients would be less confused and less tempted to cheat
on reporting their earnings.
Finally, critics of the test maintain that repealing it not only would have no long-
range costs, it would have positive budgetary and economic effects. They argue that
people would work more and pay more Social Security and other taxes, offsetting the
increase in benefit payments. They contend that many people deliberately keep their
earnings below the limit, or that because of the existence of the test, have chosen to do
part-time, lower paying work rather than work in skilled professional jobs that typically
require full-time employment. The effect, they argue, is to lower the output and earnings
of productive young retirees significantly, which is particularly short-sighted in these
times when a booming economy has produced labor shortages. They maintain that if the
potential output of these workers were realized, the benefit to the economy would
substantially increase government revenues - not only directly in the form of taxes but
also in the form of rippling "multiplier" effects. Furthermore they claim that the overall
costs to the government would be relatively modest. Similarly, because of offsetting
effects, the long-range costs of repealing or reducing the earnings test are said to be
negligible. For example, one reason the earnings test was repealed for workers who have
attained the full retirement age was that in the long range it had negligible cost. Under
current law workers who do not receive benefits after their full retirement age receive a
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Social Security: Proposed Changes to the Earnings Test, report, June 23, 2003; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809231/m1/4/: accessed April 26, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.