1. The Effect of Pension Income on Elderly Earnings: Evidence from Social Security
Authors: Alex Gelber, Adam Isen and Jae Song
Discussant: Gopi Shah Goda
SIEPR-Sloan Working Longer Conference
November 2017

2. Legislative history
Prior to 1972, Social Security benefits were increased for inflation on an ad hoc basis
An automatic benefit increase provision was adopted in 1972
Inflation rate was 3.2%
OASDI had a positive actuarial balance
Projections of this provision assumed an average annual inflation rate of 2.75% and a wage growth of 5%
By early 1973, it was clear that inflation would be higher than had been expected

3. Legislative history
In 1974, the Trustees Report issued its annual report and revealed a “startling actuarial imbalance of 2.98% of taxable payroll,” implying that tax rates would have to be increased by 27 percent
Senate Committee on Finance appointed a panel, which issued a report highlighting the role of demographics and the 1972 benefit formula in the actuarial deficit
Panel found that the formula adopted in 1972 “responds irrationally to changes in the rate of inflation and can produce patterns of replacement ratios inconsistent with the generally understood purpose of the Social Security system” and stated that eliminating this response was essential to achieving financial soundness.
The Social Security advisory council was tasked to address the “overindexing” occurring because initial benefit levels increased as a result of two separate indexing mechanisms

4. Legislative history
Social Security Advisory council recommended removing one of the indexing mechanisms so that wages were indexed forward to the retirement year reflecting wage growth, and the percentages in the benefit formula would not change with the CPI
By 1977, the program was facing severe short- range problems, and the 1977 Amendments were signed into law on December 20, 1977
Source: Legislative Background of the 1977 Social Security Amendments, James Kelley and Joseph Humphreys,

5. Transitional guarantee
Compute benefits under the old and new system, where:
the old system benefit table would no longer be indexed after 1978
wages earned at age 62 or older cannot be used in the old benefit formula
Beneficiary receives the higher of the two
Available to those reaching retirement age in the first five years of the new formula
Did not apply to those born prior to 1917

6. The “Notch”
Source: Social Security Administration Issues and Answers: The Notch,

7. Income and substitution effects
Because earnings after age 61 were not used for cohorts born in , discounted lifetime benefits fell by ~$6,000  income effects
In addition, the net marginal returns to additional earnings after age 61 fell by 21 percent for the cohort relative to the 1916 cohort  substitution effects

8. Results
Net effect is a ~$5,000 increase in discounted lifetime earnings  income effect dominates
Using the DOB discontinuity as an instrument for benefit levels, authors find that an (unanticipated) $1 increase in benefits reduces mean discounted lifetime earnings by 61 cents  lower bound of income effect
Using a difference-in-discontinuities framework, authors estimate an insignificant change in earnings from substitution effect (extensive and intensive margin)
Much of these effects appear to be front-ended

9. Krueger and Pischke (1992)
Examine the effect of the “notch” on LFP, self- reported retirement, number of weeks worked from CPS using aggregated data from for year olds
Find that after controlling for age and year effects, no evidence that labor force participation changed with either the level of Social Security wealth nor with the growth of Social Security wealth expected from working between 62 and 65

10. Identification in Krueger-Pischke (KP)
Exploit differences in birth cohort that have different levels of Social Security Wealth due to “notch”
Assumption: variation in SSW and growth in SSW are due exclusively to differences among cohorts who are otherwise identical except for benefit notch

11. Identification in this paper (GIS)
Exploits sharp discontinuous relationship between DOB and OASI benefits that occurs for DOBs on or after January 2, 1917
Assumption: Any changes in earnings occurring in the absence of the notch reform would have occurred smoothly across the January 2, threshold

12. Comparison of results
KP: “…largest estimate of the SS wealth/LS elasticity that we find… would imply that the growth in SS benefits in the 1970s could explain less than 1/6 of the decline in male LFP observed in that time period.”
GIS: “…we find that the increase in OASI benefit levels can account for 57.6 percent of the decrease in elderly participation from 1950 to 1985…”
Reasons why they differ:
KP are not looking at earnings
LFP vs. positive earnings as measure of extensive margin
Differences in the level of variation (daily vs. annual)
Measurement error in cohort for KP (age reported in CPS, not DOB)

13. Questions/comments Ways to test spousal decisions?
Compulsory schooling laws – could effects be even larger than estimated?
Heterogeneity