The Effect of Pension Income on Elderly Earnings: Evidence from Social Security and Full Population Data

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Date and Time: 
Monday, October 24, 2016
2:00 pm – 3:30 pm

We estimate the effect of pension income on earnings by examining the Social Security Notch, which cut lifetime discounted Old Age and Survivors Insurance (OASI) benefits by over $6,100 on average for individuals born in 1917 relative to those born in 1916. Using Social Security Administration microdata on the U.S. population by day of birth and a regression discontinuity design, we document that the Notch caused a large increase in elderly earnings. The point estimates show that a $1 increase in OASI benefits causes earnings in the elderly years to decrease by 46 to 61 cents due to an income effect, and the evidence is consistent with the hypothesis that only current
(not future) benefits affect earnings. Under further assumptions we rule out more than a small substitution elasticity. Our results suggest that the increase in OASI benefits from 1950 to 1985 can account for at least half of the dramatic decrease in the elderly employment rate over this period.