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A Coming Social Security Battle?


Economic Trends

A Coming Social Security Battle?

Limiting early retirees' earnings

The long-reviled Social Security earnings test for seniors aged 65 to 69 was repealed a few months ago. But the earnings test for those aged 62 to 64 remains in place, and it's a safe bet that pressure to modify or repeal it will surface in the not-too-distant future.

For one thing, the first baby boomers will turn 62 in 2008. And starting this year, the normal retirement age for full Social Security benefits is being pushed back two months a year, until it reaches 67 in 2012. As that occurs, those 65 to 67 will also become subject to the earnings test for early retirees.

What's more, that earnings test is especially onerous. Whereas Social Security recipients age 65 to 69 would have lost $1 for every $3 they earned over $17,000 this year (and $30,000 in 2002), those age 62 to 64 lose $1 for every $2 they earn over $10,800, with the limit rising modestly in future years.

Thus, counting just that 50% bite, plus payroll taxes of 7.65%, early retirees face an apparent marginal "tax rate" of 57.65% on earnings above the threshold. (Actually, any reduction in their benefits is made up when they reach 65 because the system is designed so that they get the same lifetime payout regardless of when they retire.)

In any case, says economist Leora Friedberg of the University of California at San Diego, "it doesn't seem to make sense to impose this kind of a perceived work disincentive on younger beneficiaries." Her own research suggests that the recent repeal of the earnings test for older beneficiaries will boost their work hours by about 5%.

So why do some economists oppose repeal of the remaining test? Because, says Jonathan Gruber of the Massachusetts Institute of Technology, it could dramatically change the system. In actuality, he says, there's little evidence that the current test discourages a lot of work effort. Indeed, labor-force participation by those aged 60 to 64 has been rising since the mid-1980s (chart).

What the test has done, he notes, is to discourage many people still in the workforce from filing for early benefits--partly because they don't realize that any benefits they lose will result in an upward adjustment of their monthly pensions when they reach 65.

If the earnings test were lifted entirely, on the other hand, he predicts that most workers would opt to start collecting Social Security at 62. And that would cut their monthly checks by 20% relative to what they would have gotten if they waited till 65. As a result, many older retirees--especially single women and widows in their 80s and 90s--could wind up in poverty.

With the earnings test, notes Gruber, Social Security acts as a kind of "forced saving program"--inducing people to postpone consumption in their early 60s in exchange for higher income later in life. The question, he says, is "how much do we want to change that, when it's clear that a lot of people still aren't saving enough for retirement?"By Gene KoretzReturn to top

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Venture Capital: The Beat Goes On

But fears could soon cut the flow

The venture-capital boom continued unabated in the first quarter, reports PricewaterhouseCoopers, which tracks the industry. According to its tally, venture funding hit a new high of $17.2 billion, four times the year-earlier level. At the same time, both the number of companies getting funds and the average amount doled out doubled.

Technology companies accounted for 93% of the quarterly total, of which Internet-related companies received the lion's share. Some 45% of the pie went to companies in the early stages of development.

A key question now is how the huge sell-off in technology stocks affected activity in the second quarter. Stay tuned for PricewaterhouseCoopers' next report.By Gene KoretzReturn to top


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