Question

2. Consider the following proposed changes to the current Social Security earnings test (i.e. from the one we discussed in class) and determine if the changes lead to higher hours of work among retirees. a. A change in the amount of exempt labor earnings from $17,000 to $25,000. b. The government would reduce benefits by 50 cents for every dollar earned above $25,000 rather than 33 cents as discussed in class.

Answer 1

a. A change in the amount of exempt labor earnings from $17,000 to $25,000 will lead to a decrease in the number of working hours among retirees. Assume a retiree earns $18,000 and before the limit was raised he would lose a portion of yearly benefits as per the rules of the social security earnings test. But now, assuming amount of exempt labor earnings is increased to $25,000 he will get the full amount of social security benefits as the deductions do not apply below the limit. So, now the retiree receives more income than previously received for the same amount of working hours. Hence , the retiree can work lesser number of hours to get the same amount.

b. Assuming the government would reduce benefits by 50 cent for every dollar earned above $25,000 rather than 33 cents, the number of working hours of the retirees would increase as they have to work more now in order to get the same amount as they did earlier before the benefits were reduced.