NY25-04: How Does the Social Security Retirement Earnings Test Differentially Impact Racial and Ethnic Minorities?

The Social Security Retirement Earnings Test (RET) restricts the benefits of individuals who have not yet attained their Full Retirement Age (FRA) and who earn more than specified amounts. These benefits are not lost; they are withheld and actuarially adjusted once an individual attains their FRA (CRS 2023). Although previous research shows that some workers behave as if they perceive the RET as a tax and restrict their labor supply (Friedberg 1998 & 2000, Friedberg and Webb 2006 & 2009, Benitez-Silva and Heiland 2007 & 2008), no study has investigated either the differential impact of the RET by race and ethnicity or the decision-making processes of the affected workers on claiming Social Security and determining how much to work. The RET may differentially affect race and ethnic minority workers in four ways: 1) they may be more likely to have earnings within the range covered by the RET. 2) they may claim benefits earlier and be subjected to the RET. 3) they may be more likely to perceive the RET as a tax and respond by reducing their labor supply or increasing cash work. 4) the mechanics of the RET, specifically that the entire monthly benefit amount is withheld until the projected year’s charge has been recovered may adversely affect the liquidity constrained and may further discourage labor supply even among those who correctly understand that the RET is not a tax. Using quantitative analyses, we will gather evidence of differential impacts of the RET on racial and ethnic minorities by testing for differences in the degree of bunching below the RET and estimating variations in the degree of labor supply restriction across groups of workers. Building on Dushi, Friedberg and Webb (2021), we will look to better understand differences in early benefit claiming across demographic groups. Using original qualitative analysis, we will probe the specific attitudes of racial and ethnic minority workers toward the RET and investigate how they arrive at their labor supply and claiming decisions. Do they misperceive the RET as a tax, are they engaging in heuristic trial and error, or are they prioritizing current over future consumption? Would a better understanding of the RET have affected their decision? To what extent is their labor supply underestimated due to unreported cash work?