Retirement & Financial Planning Report

Report: Social Security earnings test dissuades continued work by reducing benefits for those who earn above certain thresholds.

The trend toward longer working careers would be even more pronounced except that provisions of some benefit programs such as Social Security make extended work “less rewarding,” says a study from the Brookings Institution.

It said that as of 2014, 50.2 percent of those aged 62-64 and 26.2 percent of those aged 65-74 were still working. That’s up from 38.7 and 17.2 percent 20 years earlier.

As life expectancy has risen, “retirement at any age requires more savings and pension assets to achieve the same level of annual income. We expect that further increases in life expectancy will lead more individuals to want to work longer and delay retirement,” it says.

However, it said for example that the Social Security earnings test dissuades continued work by reducing those benefit for those who earn above certain thresholds between age 62 and full retirement age (currently 66). It said that one option would be to eliminate the earnings test—which it notes has been revised numerous times since it was created as part of the original Social Security law in 1935.

“Social Security was established in the middle of the Great Depression when unemployment rates were very high, and thus a policy encouraging older workers to leave the labor force then seemed appropriate for the federal government. Today, however, providing incentives for older workers to leave the labor force should no longer be a national objective. Instead, national policy should be focused on removing policies that provide disincentives for older persons to remain in the labor force,” it says.

Another disincentive to continued working is the continued taxation of both employees and employers once the worker passes Social Security eligibility age. One potential response would be to institute a “paid-up” provision of Social Security, when neither workers nor employers would have to continue paying the payroll tax but earnings would not boost future benefits. While that would reduce the money coming into Social Security, “some individuals who would be outside the labor force under current rules would decide to enter the labor force,” bringing in more general tax revenue.

Creating a point beyond which Medicare taxes would no longer have to be paid from earnings would have a similar effect, it added.