(September 2000) In Washington it’s unusual that legislation passes quickly and unanimously, but that’s what happened this spring when Congress repealed the Social Security earnings cap for retirees between the ages of 65 and 69. The lifting of the cap is expected to put more money into the pockets of older workers, encourage recent retirees and those nearing retirement to continue working, and help ease employers’ hiring needs in the currently tight labor market.

Although a widely popular move, the removal of the earnings cap for retirees ages 65 to 69 is not expected to have a large impact initially. Over the next 10 years, however, the act likely will lead older workers to increase their labor force participation. The increase in working hours could fill the equivalent of 250,000 full-time jobs, according to Aldona Robbins, senior research fellow with the Institute for Policy Innovation in Lewisville, Texas. The figure below shows the increase in labor force participation of 65-to-69-year-olds since 1980. The Bureau of Labor Statistics estimates that the total labor force will grow by 16.9 million over the next 10 years.

Labor Force Participation Rate of Americans Ages 65 to 69, by Sex, 1980 to 1999

Source: U.S. Census Bureau, Current Population Survey, annual averages.

The earnings cap was created as part of Social Security during the Great Depression in an effort to encourage older workers to leave the labor force so younger people could more easily find work. Many changes have since been made to the earnings cap. The legislation that Congress approved and President Clinton signed this spring repeals the penalty that reduces Social Security benefits by 33 cents for each dollar that workers ages 65 to 69 earn above $17,000 this year.

Social Security Administrator Kenneth Apfel testified earlier this year that about 800,000 workers ages 65 to 69 lost some or all of their benefits in 1999 as a result of excess earnings. And 150,000 dependent and spousal beneficiaries were affected as well.

In the short term, the lifting of the earnings cap will affect more men than women, said Eugene Steuerle, a senior fellow at the Urban Institute in Washington, D.C., because there are more men working in their sixties. As of last May, 1.32 million men ages 65 to 69 worked, compared with 997,000 women in that age range, according to Bureau of Labor Statistics data.

Working men ages 65 to 69 who have kept their earnings at or below the earnings limit are most likely to increase their work hours now, in the view of Leora Friedberg, a research fellow with the National Bureau of Economic Research. She predicts that these men will work 50 percent more, whereas those who had been losing some of their benefits will work about 18 percent more.

Working women will respond similarly, Friedberg believes. Widows could end up gaining most from the change. “For widows, I see removing the earnings cap as being more of a win-win [than for any other beneficiaries],” said Robbins. “They tend to be the poorest of those 65 and older.” Over the long term, the removal of the cap will help increase the number of women in the workforce. “Men are retiring earlier … and women are entering the work force at a faster pace,” Steuerle said.

For the time being, Congress has left intact the regulations governing benefits for workers on either side of the 65-to-69 age group. The earnings cap for those between the ages of 62 and 64, for example, remains in force. Social Security benefits will thus continue to be reduced by $1 for every $2 of earnings above $10,080 per year for those opting to receive benefits before age 65. On the other end, workers ages 70 and older remain exempt from the cap.

Not all retirees in the 65-to-69 age group will don their suits or dust off their lunch pails and jump back into the work force. Sixty percent of those eligible to collect reduced benefits from Social Security at 62 are doing so, according to the Social Security Administration. “Clearly, the longer you are out of the labor force, the harder it is to get back in,” said Robbins.

Christopher J. Gearon is a Silver Spring, Md.-based freelance writer.

Related Publications

For more information from the Urban Institute, see the website for that organization’s Retirement Project: www.urban.org.

A working paper by Leora Friedberg titled “The Labor Supply Effects of the Social Security Earnings Test” may be ordered online from the National Bureau of Economic Research: papers.nber.org/papers/W7200.