Labor Supply of Older Men: Does Social Security Matter?

1. INTRODUCTION Interest in the economic affairs of the elderly has grown tremendously in the past decades. This increased interest in the economics of aging is only natural if one considers the demographic changes that have taken place since World War II. In 1950, 8.1% of the U.S. population was age 65 or older compared to 12.7% in 1999 (U.s. Bureau of the Census, 1999). Current projections estimate that by 2050 over 20% of the U.S. population will be at least 65 years old. At the same time that these demographic changes have taken place, the working habits of the elderly have also changed. The labor force participation rates of older males have decreased significantly over the past 30 years as retirement ages have fallen sharply. In 1950, over two-thirds of all males age 55 or older participated in the labor market. By 1993 this number had decreased to 38% (U.S. Bureau of the Census, 1999). These developments raise many important questions and concerns. One obvious and much publicized area of concern is the viability of th e Social Security system. Whether the trend toward earlier retirement will continue is uncertain. In any case, a better understanding of this trend and its causes seems vital if we are to make informed public policy decisions. The literature to date offers no consensus as to the causes of the drastic decline in postwar participation rates of the elderly. One prominent hypothesis has been the proliferation of the Social Security program. Established in 1935, the program has rapidly increased coverage and generosity since 1950. Art additional fact that has encouraged investigations into the link between Social Security and labor force participation are the precipitous declines observed in male participation rates at ages 62 and 65, the early and normal Social Security retirement ages, respectively. Despite the attention Social Security has been given in the literature, there exists a great amount of uncertainty as to how much of the observed declines in labor force participation can be attributed to changes in Social Security retirement benefits. This article reexamines the effects of Social Security on the aggregate labor supply of older men. The empirical analysis utilizes a panel data set containing participation, wage, and Social Security information for cohorts defined by birth year and educational attainment from 1967 to 1996. Using ordinary least squares and within cohort estimates I present evidence of a negative and significant relationship between the level of Social Security Wealth and labor force participation rates. I also find a significant positive effect of the monetary return to working on labor force participation rates. Next to wages, this monetary return to working includes adjustments made to Social Security payments due to the postponement of retirement. Within cohorts I find evide nce of sharp decreases in the return to working at ages 62 and 65, which might explain the prevalence of retirements from the labor force at these ages. Between cohorts I find little evidence that changes in the return to working caused by Social Security are responsible for sizable reductions in the labor force participation rates of older men. Increases in Social Security wealth levels, on the other hand, are found to be capable of explaining most of the observed decline in labor force participation. The remainder of the article is organized as follows. The next section describes the decline in labor force participation for older men. This is followed by discussion of the Social Security program. The fourth section presents the empirical analysis. Using the results of the empirical analysis I then simulate the effects of the 1977 amendments and show that labor force participation rates for the first birth cohorts affected by the law change would have been significantly lower under the old law. The final section presents the conclusions. II. THE DECLINE IN PARTICIPATION Throughout this study, data to analyze labor force participation will be taken from the March Current Population Survey (CPS) files. …