Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities
Luttmer, Erzo F.P.
Seif, David G.
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CitationLiebman, Jeffrey, Erzo F.P. Luttmer, and David G. Seif. 2009. Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities. HKS Faculty Research Working Paper Series RWP09-003, John F. Kennedy School of Government, Harvard University
AbstractA 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
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