Economic Report President

available with the same hourly pay, benefits, and working conditionsas full-time jobs, so that many may prefer to stop working completelyrather than take a part-time job. Other individuals may wish to retireor work part time even before age 62, but cannot yet collect any SocialSecurity benefits and do not have sufficient savings and pensionincome to live on. Because future Social Security income cannot beused as collateral for a loan, this creates an incentive to continueworking until age 62. All of these considerations help to explain thespike in retirements at that age.The fact that Social Security benefits deferred beyond age 65 areincreased by only 5.5 percent per year (for workers aged 65 in 1998-99)means that Social Security wealth declines for a worker with lifeexpectancy equal to or lower than the average who continues to earnmore than the exempt amount beyond that age. As recently as 1989,the increase was only 3 percent per year. (See Box 4-2 for an explanationof this phased-in increase in benefits deferred beyond the NRA.)This provision has acted like an additional tax on earnings above theexempt amount that kicks in at age 65. Although the exempt amount ishigher at ages above the NRA than below it, good part-time jobs maynot be available for workers over age 65. The decline in Social Securitywealth for persons whose earnings exceed the exempt amount at ages65 and above has provided a special incentive to retire at that age,which is reflected in another drop in labor force participation and aspike in retirements at age 65 (Charts 4-5, 4-6, and 4-8). The rules governingprivate pension and Medicare benefits, as well as other socialfactors, also create incentives to retire at 65, as discussed elsewhere inthis chapter.Because the Social Security rules do not vary across persons in agiven age group, it has been difficult to measure Social Security’seffect on labor supply separately from other factors. One study useddata for age groups that were subject to different exempt amountsfrom just before and after changes in the earnings test rules. Thestudy found that the earnings of a substantial number of workers—over 20 percent of male workers aged 67-69, and nearly 10 percent ofthose aged 63-64—were clustered within $1,000 below the exemptamount. The cluster moved when the exempt amount moved. Thisstudy estimated that the effect of the earnings test is to reduce theaverage annual working hours of male workers aged 65-69 by about 4percent. Only 28 percent of men (and 18 percent of women) in thisage group are currently in the labor force, but more might seek jobs ifthe earnings test were completely eliminated, as the President hasproposed.In recent years the most common age for starting Social Securitybenefits has shifted from 65 to 62. Part of the explanation may be thecontinuing increase in lifetime income, which allows recent cohorts toretire earlier. Social norms may also be shifting, making it more145