SECCIÓN 250 PUESTA A TIERRA A Disposiciones generales

The Social Security Act of 1935 laid the foundation for the old age pension program in the U.S.; a key feature of the Act was the earnings test, a test that all eligible individuals above age sixty-five must pass to receive their benefits.11 In its earliest form the earnings test withheld complete monthly benefits of an eligible individual who had positive earnings in that month. Older workers who lost their benefits to the earnings test were not compensated at a later date upon cessation of work. 12 The 1939 Amendment set an “exempt” amount on earnings is an upper limit which an employed older worker could earn and still qualify to receive full benefits. Workers who claimed benefits while earning above the exempt amount had their full benefits withheld, in other words their benefits were taxed at a rate of hundred percent. The earnings test in its early form, thus, actually provided and was accurately perceived by workers as providing a strong disincentive to work. In an effort to reduce the work impeding effects inherent in the initial version of the earnings test, it was modified on several occasions. The major modifications to the

11 _{The Social Security Act of 1935 also set the NRA (NRA) for both men and women to 65. The}

NRA is the earliest age at which an individual can receive his full social security benefits based on his earnings record.

12 _{In its original version, the earnings test reduced incentives to work for individuals above age}

earnings test can be succinctly summarized by considering how they affected the age range covered by the earnings test and the earnings test parameters that apply within each age range.

Ages 62-NRA: Later amendments to the Social Security Act introduced the early retirement age of sixty-two to provide individuals below the NRA (NRA) early access to their benefits. This option was extended to women in 1956, and men in 1961; earlier access to benefits, however, imposed a penalty by reducing the size of the benefits

available at age sixty-two.13 The eligibility for early retirement benefits also extended the earnings rules to ages below the NRA. Until the late 1970s individuals below the NRA faced the same earnings test parameters as individuals above the NRA. Both age ranges shared a common exempt amount, and earnings in excess of the exempt amount were also taxed at the common rate of 50 percent.14 The Social Security Amendment of 1977 introduced the first major change in the earnings test parameters that applied differently for those below relative to those above the NRA. Beginning in 1978, social security beneficiaries below the NRA faced a lower exempt amount than those above. 15 _The

13 _{An insured individual can claim unreduced benefits based on his earnings history and}

equivalent to hundred percent of his Primary Insurance Amount (PIA) at his NRA. The monthly benefit for a worker is calculated in three steps. The first step is to index the annual taxable earnings of a worker to the national average wage index. From these indexed earnings, the highest 35 years of earnings between ages 21 and 62 are chosen to compute the Average Indexed Monthly Earnings (AIME). The second step is to compute the workers’ PIA from the AIME; the PIA is the full benefit an individual is entitled to if he claims at the NRA. The third step is to compute the final benefit amount received by the worker; this amount could be higher or lower than the PIA depending on the age at which the benefit is first claimed.

14 _{In 1961, the earnings test was modified to include two exempt amounts, earnings above the}

lower exempt amount were taxed at a rate of 50 percent while earnings in excess of the upper exempt amount were taxed at a rate of 100 percent. The Amendment of 1972 removed the100 percent tax rate, all individuals between ages 62-69 who earned above the exempt amount faced a tax rate of 50 percent until benefits were fully exhausted.

15 _{Over the years the earnings test threshold was raised several times on an ad hoc basis until}

Greenspan Commission led to the Social Security Reform Act of 1983 that laid down further provisions separating the earnings test parameters that applied to those below relative to above the NRA. The 1983 Reform, which became effective in 1990, stipulated that working beneficiaries above the NRA whose earnings exceeded the exempt amount would face a lower tax penalty of 33 percent while individuals below the NRA would continue to face a penalty of 50 percent. Since the late 1970s, when the labor force participation rate of older men declined precipitously, the general direction of the

modifications to the earnings test rules have been towards loosening them for individuals above the NRA relative to those below. Table 2.1 summarizes the earnings test rules faced by individuals ages 62 and above during the time period 1996-2013.

Another important difference in the set of rules that apply to individuals below the NRA relative to those above is the treatment of delayed or postponed receipt of benefits. Since the creation of the early retirement age, individuals below the NRA receive a compensation for delayed receipt of benefits. If an individual below the NRA delays receiving benefits for one year, his future benefits are raised to compensate for the loss of current benefits by applying an adjustment called the actuarial adjustment factor. The size of the actuarial adjustment factor has remained constant at an annual rate of

approximately 6.67 percent.16 These actuarial adjustments to future benefits also apply to benefits that are withheld under the earnings test. In other words, when older

beneficiaries between the ages 62-NRA earn more than the exempt amount and lose some

16 _{Between ages 62 – NRA, each year of delayed receipt of benefits raises future benefits by 6.67}

percent. In recent years the NRA has also risen from 65 to 66. For older individuals with a NRA of 66, the actuarial reduction factor between ages 62 – 63 is lowered to an annual rate of 5 percent.

or all of their benefits to the earnings test, their future benefits are raised at an annual rate of 6.67 percent to compensate for the loss of current benefits. The actuarial adjustments for benefits withheld under the earnings test, however, apply only after the individual attains the NRA. To summarize, despite the modifications to the earnings test parameters over time, in recent years the two main parameters that apply to individuals below the NRA have been fairly constant. During the time period 1996-2013 working beneficiaries below the NRA face an unchanging tax rate of 50 percent for earnings above the exempt amount, and the loss of current benefits withheld due to the earnings test is later

compensated by applying an unchanging annual actuarial adjustment of 6.67 percent to future benefits.17

NRA-age 69: Although individuals below and above the NRA faced a common exempt amount until 1978 and a common tax rate of 50 percent until 1990, they differed in the rate at which delayed/postponed current benefits were compensated. Before the 1972 Amendment, individuals above the NRA were not compensated for current benefits that were lost either due to delayed claiming or benefits that were withheld under the earnings test. To compensate individuals above the NRA for delayed/postponed claiming, a DRC provision was first introduced in 1973, it raised future benefits at an annual rate of 1 percent. At an annual rate of 1 percent, however, the DRC actuarial adjustment was much lower than the actuarial adjustment of 6.67 percent that was applied to future benefits of individuals below the NRA. To encourage work among older individuals, the

17 _{Since the earnings test repeal of 2000, a looser earnings test applies in the year an individual}

attains his NRA. An individual below the NRA faces a higher exempt amount and a lower tax rate of 33 percent in the year he reaches his NRA, the looser earnings test applies only in the months prior to the month is which the individuals is at his NRA.

1983 Reform to Social Security raised the NRA and the DRC for future cohorts of older workers. Both these policy changes affected individuals based on their birth cohort. Table 2.2 summarizes the birth cohorts affected by each policy change. The NRA increased from 65 to 66 for birth cohorts 1938-43 in increments of two months, while the DRC increased every other year at a rate of half a percentage point from 3-8 percent for birth cohorts 1925-43. Viewed in light of the historical context of the Social Security program, these recent increases in the DRC from 3 to 8 percent are quite generous, and

substantially raise the reward for delayed benefit receipt for older individuals above the NRA.

The most prominent change in the Social Security system that has directly affected older workers between NRA-age 69 is the unanticipated repeal of the earnings test in April 2000. As described above, prior to the 2000 elimination older workers eligible for social security benefits were subject to the earnings test between ages 62-69, and workers between NRA-age 69 faced a higher exempt amount and a lower tax rate of 33 percent relative to older workers below the NRA. The earnings test repeal of 2000 did not affect the earnings test parameters for individuals below the NRA.

The repeal of the earnings test in the year 2000 also affected the manner in which older workers can benefit from the DRC. Before 2000, older individuals above the NRA could raise their future social security benefits through the DRC in two ways, by either postponing the receipt of benefits if the individual has not already claimed, or by working above the exempt amount if already collecting benefits. Beneficiaries who worked above the exempt amount and lost some or all of their benefits to the earnings test could

2000, however, beneficiaries above NRA could take advantage of the DRC through the “claim and suspend” policy. In the absence of the earning test, the claim and suspend policy allows beneficiaries who have claimed their benefits to temporarily suspend them and receive DRC adjustments on the foregone (suspended) benefits. In summary, during the 1990s, individuals above the NRA faced looser earnings test parameters in the form of a higher exempt amount and a lower tax rate than those below the NRA, and in April 2000 the earnings test was completely eliminated for those above the NRA. In the time period after the 1990s, older individuals above the NRA also experienced a substantial increase in the DRC adjustments that compensate them for loss of current benefits by raising future benefits.

Ages 70-74: Under the Social Security Act of 1935 the earnings test applied to all older workers above age 65. This restriction on the age limit was first relaxed in 1951, when older workers above age 75 were exempted from the earnings test. Four years later another amendment repealed the earnings test for all workers above age 72. The 1983 reform further repealed the earnings test for individuals between ages 70-72. Since, the year 1983 all workers above age 70 have not faced the earnings test. Age 70 is also the maximum age until which social security benefits can be postponed; after age seventy benefits are automatically paid to all eligible beneficiaries. The upper limit on the age until which social security benefits can be postponed is important because it signifies that the DRC adjustments also cease to apply after age 70. In recent years, thus, older workers above age 70 were not subject to either the earnings test or any DRC adjustments.

2.3. PERCEPTIONS OF EARNINGS TEST AND THEORETICAL