Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities

61 Pages Posted: 15 Jan 2009 Last revised: 25 Sep 2022

See all articles by Jeffrey B. Liebman

Jeffrey B. Liebman

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Erzo F. P. Luttmer

Dartmouth College; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

David Seif

affiliation not provided to SSRN

Date Written: December 2008

Abstract

A key question for Social Security reform is whether workers currently perceive the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find clear evidence that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10 percent increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.1 percentage points from a base rate of 15 percent. The evidence with regards to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.41 and statistically significant, but we do not find a statistically significant earnings elasticity.

Suggested Citation

Liebman, Jeffrey B. and Luttmer, Erzo F.P. and Seif, David, Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities (December 2008). NBER Working Paper No. w14540, Available at SSRN: https://ssrn.com/abstract=1327216

Jeffrey B. Liebman (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.jeffreyliebman.com

National Bureau of Economic Research (NBER)

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Erzo F.P. Luttmer

Dartmouth College ( email )

Department of Economics
Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

David Seif

affiliation not provided to SSRN ( email )

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