Earnings Adjustment Frictions: Evidence from Social Security Earnings Test

88 Pages Posted: 31 Dec 2013

See all articles by Alexander Gelber

Alexander Gelber

National Bureau of Economic Research (NBER); University of California, Berkeley

Damon Jones

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: October 31, 2013

Abstract

We study frictions in adjusting earnings to changes in the Social Security Annual Earnings Test (AET) using a panel of Social Security Administration microdata on one percent of the U.S. population from 1961 to 2006. Individuals continue to "bunch" at the convex kink the AET creates even when they are no longer subject to the AET, consistent with the existence of earnings adjustment frictions in the U.S. We develop a novel framework for estimating an earnings elasticity and an adjustment cost using information on the amount of bunching at kinks before and after policy changes in earnings incentives around the kinks. We apply this method in settings in which individuals face changes in the AET benefit reduction rate, and we estimate in a baseline case that the earnings elasticity with respect to the implicit net-of-tax share is 0.23, and the fixed cost of adjustment is $152.08.

Suggested Citation

Gelber, Alexander and Jones, Damon and Sacks, Daniel W., Earnings Adjustment Frictions: Evidence from Social Security Earnings Test (October 31, 2013). US Census Bureau Center for Economic Studies Paper No. CES-WP-13-50. Available at SSRN: https://ssrn.com/abstract=2373554 or http://dx.doi.org/10.2139/ssrn.2373554

Alexander Gelber (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Damon Jones

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies ( email )

1155 East 60th Street
Chicago, IL 60637
United States

Daniel W. Sacks

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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