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Retiring Early? Find a Hobby

Economists and experts on aging say we should encourage the elderly to stay, or get back, in the workplace. But many seniors are not doing so because of a quirk in the law.
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In 1935, at the height of the Depression, the last thing the government wanted to do was encourage older Americans to keep working. With unemployment at 20 percent, no one wanted seniors staying in positions that could go to young and middle-aged workers, many of whom were desperately trying to support families. Retirement was, in a sense, patriotic.

This attitude is reflected in the Social Security system, which was signed into law that year. The bill creating the system states that any individual over age 65 who engages in “regular employment” during a given month will lose his or her Social Security benefits for that month. (“Regular employment” was later specified as earning $15 or more — a strict limit even in those pre-inflationary days.)

Today, the labor landscape looks very different. Given the nation’s changing demographics, economists cite an increasing need for seniors with specialized job skills to stay in the work force in some form, while surveys of seniors suggest a large majority of baby boomers want and expect to keep working beyond the normal retirement age.

Yet, current law discourages a significant number of older workers — those who take early retirement at age 62, 63 or 64 — from earning more than a minimal amount. The Social Security benefits of these workers are reduced by $1 for every $2 they earn over $13,000.

Previous studies have found that this restriction — officially named the retirement earnings test, or RET — does not play a substantial role in seniors’ decisions about whether and how much to work. But a new report by economists Steven J. Haider of Michigan State University and David S. Loughran of the RAND Corporation, just published in the Journal of Human Resources, suggests the law is in fact keeping potentially productive people out of the work force.

“Previous estimates had the number at well under 1 percent of workers (who were discouraged from working because of the cap),” Haider said. “Our study found that is way off.”

Haider and Loughran concluded at least 4.8 percent of early retirees have cut back the hours they work to avoid a reduction in their Social Security benefits. The actual number, Haider added, could be considerably higher.

“There are people we miss — like those who look at their options and say, ‘I’m not going to even bother working,’” he said. “Suppose you were a lawyer or doctor. Working part-time and earning $13,000 might not be a reasonable option.”

Or suppose you are working several days a week at Wal-Mart. “Not all part-time workers can choose to work a precise number of hours,” Haider noted. “I might not have the ability to say, ‘When I hit $13,000, I’m going home.’”

In other words, a senior may have a choice between working two days a week and earning $11,000 a year, and working three days a week and earning $14,000 a year. According to Haider, many in that position are opting for the lower salary to avoid getting their Social Security benefits slashed.

The RET applies to Social Security recipients between the age of 62 and the “normal” retirement age, which is gradually increasing from 65 to 67. (Those born between 1943 and 1954 can collect their full benefits by retiring at age 66; those born in 1960 or later will have to wait until they’re 67.)

“That means additional people will be covered (by this restriction in future years),” Haider said. “If this is exactly the population we want to encourage to be in the work force, even discouraging 5 to 10 percent might be a silly policy.”

There is considerable precedent for adjusting the retirement earnings test: It has been altered many times over the decades. In 1950, the RET was eliminated for those over age 75; that age was subsequently lowered to 72 in 1954 and to 70 in 1983. In 1960, the penalties for working were lightened: Instead of losing all Social Security income, those who chose to work would lose $1 in benefits for every $2 they earned.

In 2000, Congress overwhelmingly passed the “Senior Citizens’ Freedom to Work Act,” which eliminated entirely the earnings ceiling for anyone above normal retirement age (then 65). But the restriction continued to apply to those taking early retirement.

The new law enabled Haider and Loughran to study seniors’ work habits from a variety of angles. They looked at shifts in reported income among seniors ages 65 to 69, who, as of 2000, suddenly were under no restrictions. They also examined how income changed when people advanced from age 64 (meaning the cap was in place) to 65 (when it was not).

“On average, people increased their take-home earnings by a tremendous amount (when the tax was no longer an issue),” he said. “As this tax disappears — whether it’s changed because of legislation, or whether people age past it — they absolutely increase their earnings.”

The RET does not affect the solvency of the Social Security system. The way the system is structured, people who are penalized from ages 62 to 65 actually get bigger checks later on, so the net effect is neutral. (As more seniors work, there may be some small benefit to the system since they are continuing to pay into it through their payroll taxes.)

Haider does not believe a change in the law would be a huge help to low-income seniors. “The fact is, the people who are working at these older ages are, for the most part, the healthiest, wealthiest and best-educated individuals,” he said. “It’s much easier for someone with a cushy job like a professor of economics to work at age 75 than it is for somebody who has been loading steel beams onto a truck for 50 years.”

Given that, “The people who are working and are responding to this policy are probably those who are most likely to have adequate savings.” The extra income from working is welcome, but it’s probably not the only thing standing between them and poverty.

Nevertheless, “My personal view is this policy is an antiquated relic,” Haider said. “I don’t have any formal analysis to justify that. But I don’t see much point of having this policy — or at least to have it extend to more and more people.

“A lot of gerontologists now talk about the importance of the elderly remaining active. So it’s not just a matter of our economy might need to rely on the elderly. Perhaps we should let the elderly stay in the work force for their own good.”