Why are older men working more? The role of social security

The labor supply of older men increased from the 1930s to the 1950s cohort. This paper explores the role of three Social Security changes in determining these differences: a delayed normal retirement age, increased delayed retirement credits, and a change in the earnings test that was eliminated beyond the retirement age, and evaluates the effects of several proposed reforms to the Social Security program on individuals’ behaviors. I develop and estimate a rich dynamic life-cycle model of labor supply, savings, and Social Security application for healthy and unhealthy people using the Method of Simulated Moments for the 1930s birth cohort. The model captures the key structure of the Social Security retirement benefits, pension systems, and disability insurance, while taking into account uncertainties in health and disability, survival rates, wages, and medical expenditures. My model matches well the observed life-cycle profiles of employment, hours worked by workers, and savings for healthy and unhealthy people from the Panel Study of Income Dynamics data, and generates labor supply elasticities that rise with age and are smaller for healthy workers. It shows that the joint effects of the three changes in Social Security rules account for over 73% of the observed rises in labor force participation and hours per worker by the 1950s cohort. Of the three changed rules, the change in the earnings test contributes the most to the labor dynamics of older men. Additional policy experiments suggest that postponing the retirement age has little effect on older workers, while eliminating the earnings test and reducing retirement benefits by 23% would further increase older-age participation by 3.4 and 5.1 percent, respectively. Social Security Administration and Study of Dynamics calculations. of older men across cohorts. Compared with previous studies, my model fits the labor supply and savings profiles by health status very well after incorporating heterogeneity in health and disability, health-dependent medical expenditures, and the key features of disability benefits. My model shows that the three changed Social Security rules explain most observed rises in the older-age labor supply along both margins across cohorts. Of the three changed rules, eliminating the RET beyond the NRA provided the greatest contribution to these increases. Additional policy experiments suggest that postponing the retirement age has small effects on individual behaviors, while eliminating the RET completely and reducing retirement benefits by 23% would further increase the older-age labor supply.