اثرات عرضه نیروی کار از کاهش های اخیر به نفع امنیت اجتماعی: برآوردهای تجربی با استفاده از ناپیوستگی کوهورت

In response to a “crisis” in Social Security financing two decades ago Congress implemented an increase in the Normal Retirement Age (NRA) of 2 months per year for cohorts born in 1938 and after. These cohorts began reaching retirement age in 2000. This paper studies the effects of these benefit cuts on recent retirement behavior. The evidence suggests that the mean retirement age of the affected cohorts has increased by about half as much as the increase in the NRA. If older workers continue to increase their labor supply in the same way, there might be important implications for the estimates of Social Security trust fund exhaustion that have played such a major role in recent discussions of Social Security reform.

In 1983, the U.S. Congress implemented an increase in the Normal Retirement Age (NRA) of 2 months per year, an increase that started in 2000. Each two-months increase in the NRA translates into a little less than a 1 percentage point reduction in Social Security benefits.1 This reform is likely to influence two important decisions that workers face at the end of their careers: (1) when to start collecting Social Security benefits, and (2) when to retire. Since benefits are adjusted actuarially with respect to the entitlement age, the long-term solvency of the Social Security trust fund depends more on retirement decisions than on claiming decisions. An increase in labor force participation generates more contributions, which are the trust fund's main source of revenue. This paper studies the effects of an increase in the NRA on recent retirement behavior, providing an ex-post evaluation of the reform.2 The identification is based on the assumption that after controlling for labor and financial market conditions, and for several worker characteristics, any observed trend-discontinuity in the average retirement age between workers born before and after January 1938 is due to the corresponding change in the NRA. The evaluation yields both substantive evidence to inform future reforms and a guide to the calibration of structural models of retirement decisions. The results also raise serious questions about how best to improve the models on which earlier research was based. Using the change in the NRA to estimate the effect of Social Security incentives on labor supply provides additional benefits: the exact change in benefits is known, it is not prone to measurement error, and it is exogenous. Two recent papers have analyzed how the change in the NRA affects labor force participation Pingle (2006) and Blau and Goodstein (2007).3 Pingle's analysis focuses on how changes in the delayed retirement credit (DRC), the actuarial adjustment of social security benefits received for delaying claiming past the NRA affects labor force participation, but he also finds that the increase in the NRA increases labor supply among workers aged 60 to 64 and, similar to me, not among those aged 65 to 69. His results are very sensitive to the specification, which is probably driven by the low number of workers born after 1937 in his sample and by the use of a data set that is not aimed at producing official statistics on labor force participation. Due to the timing of the reform, workers born before 1938 are the control group and workers born in or after 1938, those who experience a reduction in benefits, are the treatment group. Pingle uses SIPP data up to 2003, which is when the first “treated” cohort is 65 years old. Instead, my analysis uses monthly Current Population Survey (CPS) data from January 1989 to January 2007. Unlike Pingle, this paper controls for censoring by focussing on workers younger than 66. There are, therefore, four treated cohorts distributed over the age range of 61 to 65: 1938, 1939, 1940, and 1941. Blau and Goodstein (2007), on the other hand, aggregate CPS and SIPP data based on age, calendar year, and education. The resulting cohorts are matched with their average lifetime earnings and their average Social Security benefits using administrative records from the SSA. Such a strategy does not isolate the exogenous change in benefits that is due to the reforms. This might be why the authors find that an increase in Social Security benefits increase labor force participation when birth cohort effects are added to the regression. Conditional on cohort effects changes in Social Security benefits are no longer exogenous. The authors attribute the whole recent increase in the labor force participation rate of older men to the increase in education. While I do find that education explains the trend toward late retirement, the effect of education started before the increase in the NRA, and cannot explain the change in the trend. This trend discontinuity is visible in Fig. 1 and Fig. 2. The figures show the changes in average retirement age with respect to the 1937 cohort. The dotted lines show piecewise-linear fits. In all plots there is a clear break in the trend toward later retirement between the 1937 and the 1938 birth year, and the break is even more evident when a restricted sample is used to correct for measurement error in the year of birth variable. 4 In two other closely related papers Manchester and Song (2006) and Benitez-Silva and Yin (2007) look at how the increase in NRA influences social security benefit claiming. Benitez-Silva and Yin find significant effects of the removal of the earnings test and the increase in the NRA, but very small effects as a result of the increases in the DRC, though the results are hard to quantify. Manchester and Song also find significant changes at ages 62 to 65 but not at later ages. Their estimated change in the average claiming age are close to mine, which is not surprising given that retirement and benefit claiming most often happen around the same time (Coile et al., 2002). Point estimates imply an increase in the actual age of retirement of about 50% of the increase in the NRA for both men and women. The estimated trend-discontinuity does not change significantly when controlling for: i) other reforms that happen contemporaneously (the delayed retirement credit and the earnings test removal), ii) changes in the cost of living adjustments, iii) changes in local labor demand (unemployment rate and average number of hours worked), iv) changes in the stock market index, and v) changes in socioeconomic factors. All these changes do not happen at exactly the same time as the increase in the NRA, allowing me to identify them separately. The sample starts with workers born in 1928, but the estimated trend-discontinuity is robust to choosing later initial cohorts. Also, almost all estimates of “placebo” trend discontinuity in years before or after the reform happened are not significantly different from zero. Previous studies, using out-of-sample predictions, have estimated much smaller effects on labor force participation. Four major factors may have biased previous estimates, arguably toward zero. First, projections do not capture possible changes linked to norms that are related to the NRA. Evidence suggests that some workers look at the NRA as a focal point. For example, Mastrobuoni (2006) shows that the distribution of the age at which treated workers claim their Social Security benefits no longer spikes at the month workers turn age 65, but at the month of their NRA (65 and 2 months for workers born in 1938, 65 and 4 months for those born in 1939, etc), even if there is no discontinuity in the incentives to claim at that age.5 Second, given that benefits are a function of past earnings, estimates based on these models may suffer from endogeneity bias (Krueger and Meyer, 2002). The third source of bias is that these models, since they are estimated using cross-sectional variation in Social Security benefits and retirement status, may capture long-term effects, while the 1983 benefit cuts may have been unexpected. Individuals are not always well aware of government program incentives. For example, in a recent paper (Chetty and Saez, 2009) find that providing EITC recipients with more information increases their tax refunds. Similarly, the 2007 Retirement Confidence Survey of the Employee Benefit Research Institute finds that only 18% of workers are able to give the correct age at which they will be eligible for full benefits. Three in ten believe the age is still 65, while the others either cannot answer or think it is even sooner than that. But workers get informed as they get closer to their planned date of retirement (Mastrobuoni, 2007). Life-cycle theory predicts that a worker's reaction to benefit cuts–a decrease in lifetime income–will depend on when one first learns about the reform. Attentive workers may have started reacting to the reform in 1983, and after 20 years of consumption-smoothing, the change in retirement behavior is likely to be small for them. Others have learned about the increase in the NRA in 1995 when the SSA began mailing a Social Security statement to all workers age 60 and over. The statement shows estimated benefits at different ages of retirement, including the first possible age of retirement and the NRA. Also, in 2000, the SSA added a special insert to the statement describing the changes in the NRA. The statements significantly improve workers' knowledge about their benefits but even after their introduction a many workers are likely to learn about their actual NRA only when they walk into the SSA field office in order to claim their benefits (Mastrobuoni, 2007). This result is consistent with Bernheim et al., (2001)'s finding that on average workers experience a “surprise” at retirement and thus need to reduce their consumption, which is hard to reconcile with a life-cycle model. In contrast, very distracted workers may not learn about the change in NRA until they claim their benefits. This simple theory predicts that increasing the NRA delays retirement and reduces consumption. Whenever rules change when the worker is already working, the response in terms of consumption and retirement would be stronger. This occurs because an early-informed worker has more time to smooth consumption over time, and thus will not postpone retirement as much as a late-informed one.6 The fourth problem is that in order to construct Social Security wealth, a component of all forward-looking incentives to retire, the researcher needs detailed information about past and future earnings, family structure (because of the dependent spouse and child benefits and the survivors benefits), interest rates, and preferences; in short, measurement error may be an issue. The increase in the NRA generates a reduction in Social Security wealth that is exogenous and free of measurement error.7 Despite the 1983 reform, the trust fund is projected to become insolvent in less than 40 years. While this date of insolvency is often portrayed by the news media as certain, it is only an estimate. One of the most important sources of uncertainty is the behavior of future workers and retirees.8 The NRA is scheduled to reach age 66 for the 1943 birth cohort, stay at that level for 12 years, and later resume the increase until it reaches age 67. To make better predictions, it is important to understand how these changes affect retirement behavior.

An aging population and low labor force participation rates have worsened the financial situation of the Social Security trust fund. Aware of this in 1983, on the recommendation of the Greenspan commission, the U.S. Congress passed several reforms. Their aim was to cut benefits and increase labor force participation. Among other changes, the reform scheduled an increase in the normal retirement age (reducing the benefits) for workers born after 1938. I find evidence that workers reacted strongly to this increase in the NRA. The average retirement age for cohorts that are subject to increasing NRAs is rising by about 1 month every year, or 50% of the increase in the NRA, and the increase is even larger when I control for other factors which have changed over time and which influence the labor supply decision of older workers. To obtain an estimated change in the average retirement trend that is based on more cohorts or on a wider age interval, the analysis presented here must be repeated in a few years. But given that there is intense, ongoing work to reform Social Security, conducting early analysis even with limited data is important. Early analysis, though, is only able to capture short-term effects. As time passes workers should learn that the NRA is increasing, and may thus start smoothing their consumption earlier on. This would lead to a smaller labor supply response to future benefit cuts. Despite the 1983 reform, the Social Security trust fund is projected to become insolvent in 40 years. The Social Security projections are only one of several projections made by other institutions. A common feature of all projections is that they depend heavily on the way the future behavior is modeled. My results may help evaluate the importance of an increase in the NRA on labor force participation. Although this paper is only measuring the effect on the extensive margin (workers might also respond by working more hours) the improved labor force participation is likely to lead to more contributions paid by less skilled male workers. These workers tend to have a lower probability of survival, which might reduce their Social Security Wealth net of contributions even further. According to the 2003 Technical Panel on Assumptions and Methods (Technical Panel on Assumptions and Methods, 2003), little documentation is available on how the trustees forecast labor force participation. The same panel explains that the method is based on three steps: the first is to estimate autoregressive labor force participation rates models that control for economic, demographic, and policy variables for different groups based on “age, sex, marital status, and presence of children.” For older people hazard rates are used instead of LFPRs. Social Security benefits (relative to past earnings) and the fraction of workers affected by the Social Security earnings test are included in the regressions. The second step is to subjectively adjust some estimated coefficients based on economic theory, prior beliefs, and the “full mosaic” of all estimated models. The last step is to estimate fitted values based on projections of explanatory variables. This model is likely to be accurate if changes are smooth over time. The problem is that the increase in the NRA may have introduced a break in the trend at the end of the period used by the trustees. Therefore, the break might be difficult to detect, especially if age groups (various birth years) are merged together. According to the 2004 Trustees report “changes in available benefit levels from Social Security and increases in the normal retirement age, and the effects of modifying the earnings test are expected to encourage work at higher ages. Some of these factors are modeled directly.” Nevertheless, the Social Security Advisory Board (Technical Panel on Assumptions and Methods, 2003) recommends that “Social Security should be considered explicitly since it may result in higher participation rates.” If the increase in NRA continues increasing the labor force participation of older workers, the trustees should follow this recommendation.