WORKING PAPER: Trends in Labor Supply of Older Men & the Role of Social Security

Graduate student Zhixiu Yu

Zhixiu Yu is a sixth-year graduate student pursuing her PhD. During her time at Minnesota, she has been recognized for her teaching and received multiple highly-competitive fellowships.

Why are Americans continuing to work into their late 60s? To what extent do the changes in the Social Security program rules account for the rise of the labor supply of older workers? In her working paper, graduate student Zhixiu Yu seeks to answer these, and related questions.

Social Security is one of the most important social insurance programs for the elderly population in the United States. Social Security benefits constitute the majority of retirement income for people age 65 and older. As the U.S. population is aging rapidly, the fiscal solvency of public pension systems and social insurance programs provided by the government is under threat. Therefore, understanding the role of Social Security in the recent increase in the labor supply of older U.S. workers and evaluating how further reforms to Social Security policies impact individual behaviors are essential for both older people’s well-being and policy makers’ decisions.

Over the past several decades, the labor supply of older workers, aged 65-70, in the US has been rising dramatically. During the same period, the Social Security rules in the United States have undergone some significant changes, including changes to the normal retirement age, delayed retirement credit, and Social Security earnings test. This paper examines the extent to which the changes in the Social Security program rules account for the rise of the labor supply of older workers, aged 65-70, and evaluates the effects of several policy reforms to the Social Security program on individuals’ behaviors. Yu explains her approach:

To accomplish this, I focus on two cohorts: male workers in 1930 and male workers in 1950, which correspond to the men aged 65-70 in the mid-1990s and mid-2010s, respectively. I first develop a dynamic life-cycle model in which individuals make decisions about consumption, labor supply, and Social Security application for American men who were born in the 1930s. Further, I estimate my model using the Method of Simulated Moments (MSM) estimation strategy and data from the Panel Study of Income Dynamics and the Medical Expenditure Panel Survey. I then use my estimated model to analyze the effects of changed Social Security rules faced by the 1950s cohort.

Yu's analysis shows that the elimination of the Social Security earnings test beyond the normal retirement age explains the most observed rises in the labor supply at older ages for the 1950s cohort, both in terms of labor force participation and hours worked by workers. In the working paper, she then extends the model to quantitatively evaluate the effects of several policy reforms to the Social Security program – postponing the retirement age, cutting Social Security benefits, and increasing payroll tax rates – on individual behaviors and well-being.