The Distributional Consequences of Removing the Retirement Earnings Test before the Normal Retirement Age: Results from a Microsimulation Analysis

Melissa M. Favreault, Urban Institute
Jillian Berk, Urban Institute
Caroline Ratcliffe, Urban Institute

In 2001, Rep. E. Clay Shaw introduced legislation that would repeal Social Security's Retirement Earnings Test below the Normal Retirement Age. This study examines possible distributional consequences of such a reform using a dynamic microsimulation model, Modeling Income in the Near Term (MINT3). Advocates of the proposal argue that it would remove work disincentives and reduce the Social Security system's complexity. Opponents speculate that the proposal could increase poverty among the aged if many workers elected to claim their Social Security earlier than they otherwise would have. We simulate the consequences of the reform using a series of assumptions about the size of earnings and Social Security claiming responses. Our results suggest that the reform is likely to shift retirement income from later years of retirement to earlier ones. While in the aggregate early gains sometimes offset the later losses, certain population subgroups could be particularly vulnerable under the reform.