Opposition Grows to Cuts in Social Security for Older People Who Work

A Depression-era law that cuts Social Security benefits for older people who work faces growing opposition from congressional critics who say it pushes seniors out of the labor force when the nation needs them.

Benefit reductions from the so-called “earnings test” can combine with federal, state and local taxes to produce such high marginal tax rates that many older workers do just as well staying home, foes say.

“It is a tremendous disincentive to work and a tremendous incentive to just give up and throw in the towel,” said Sen. William L. Armstrong (R-Colo.). “The marginal tax rate on some people is easily 80% and in some cases more.”

Workers aged 65 to 69 this year lose $1 in Social Security benefits for every $2 earned over $8,880, and beneficiaries under 65 face a similar reduction for earnings in excess of $6,480--a 50% effective marginal tax rate by itself. There is no limit for those 70 and older.

In 1990, the threshold is scheduled to rise to $9,360 for those 65 to 69 and $6,840 for those under 65, and the penalty will be less severe for those 65 and above: a $1 reduction in benefits for every $3 in excess earnings.

But several proposals in Congress would relax the limits further, and calls for repeal are gaining new allies.

Each year almost 1 million Social Security beneficiaries aged 65 to 69 lose some or all of their benefits because of the earnings test, and another 100,000 don’t file for benefits because of it. Others stop working, deliberately hold their earnings to just under the threshold or hide excess wages from the government to avoid the loss of benefits.

A 67-year-old woman who works at a county courthouse in Illinois recently wrote to her congressman that “because of the earnings limit, it just doesn’t pay to work beyond the $8,880 limit.”

A. Haeworth Robinson, chief actuary for the Social Security Administration from 1975 to ‘78, once had a maid who quit because he insisted on paying Social Security taxes on her wages, which would have alerted the government to her earnings. Robinson believes the earnings test is justified, but predicted that its days are numbered because of mounting opposition.

Those seeking to relax the limits include Rep. Tom Tauke (R-Iowa), who recalled that a woman who took care of his son faced such a big tax bite on her wages due to the earnings test that she “would’ve been better off if we had simply given her big presents” at Christmas and other holidays.

“It certainly made it clear to us that the system needed to be changed,” Tauke said. “This will be around for a while, but certainly the trend and the momentum is toward elimination.”

Critics say the earnings test-- created along with Social Security in the Depression when older Americans were being encouraged to retire to free up jobs for young workers--is an anachronism at a time when policy makers are trying to keep older people working longer and labor markets are tight.

They also argue that it discriminates against working-class Americans because the benefit reductions are linked only to earnings, and are unaffected by unearned income such as pensions, rent and dividends.

Supporters, meanwhile, maintain it is only fair to limit the retirement benefits paid to those still pulling in a paycheck.

Robert Ball, who headed the Social Security Administration from 1962 to 1973, said there is merit to the original concept of paying Social Security benefits to make up for earnings lost because of retirement. “We’ve already departed from that a long way and I don’t see any reason to go further in the direction of making the program a straight annuity,” he said.

That view is shared by Robinson, who said too many people believe Social Security benefits are an earned right they bought and paid for.

Most workers get back far more in benefits than they paid in taxes, government figures show. A typical worker who retired at 65 in 1988 had paid about $12,000 in Social Security taxes, which will be recovered in benefits in two years. The average retiree goes on to collect benefits for 15 to 20 years.

“If you repeal it, you’re giving in to this propaganda that this is a pension, that it bears some relationship to what you paid in taxes, and that is just not true,” Robinson said.

After years of unsuccessful legislative jostling on the earnings test, Congress appears ready to relax the restrictions over the next two years. The House this fall passed a proposal to boost the earnings threshold to $9,720 next year and $10,440 in 1991. The Senate Finance Committee passed a more generous plan to raise the limits to $11,700 next year and then to $14,520.

Social Security Commissioner Gwendolyn S. King voiced support for both proposals, saying they would “encourage seniors to remain in the work force and contribute their knowledge and experience to the nation’s economy.”

There also is growing support in Congress for outright repeal. About 150 House members are co-sponsoring a bill introduced by Rep. J. Dennis Hastert (R-Ill.), that would eliminate the test for those 65 and above.

Many Republicans in Congress long have favored repeal of the earnings test, but the idea now is gaining support among Democrats, said Carolyn Weaver, a scholar at the American Enterprise Institute. “It is far more likely that it’ll be repealed or at least loosened.”

The Social Security Administration supports the concept of scrapping the earnings test, but isn’t pushing for action because it says repeal would cost too much-- $25.3 billion over five years.

“The idea of eliminating the earnings test is the right way to go,” said spokesman Phil Gambino. “All the belief and the logic behind it still exists, it’s just the costs that are the problem.”

Some advocates for repeal, however, believe that scrapping the test would actually save money by returning thousands of retirees to the work force.

Two conservative research groups, the Institute for Policy Innovation and the National Center for Policy Analysis, issued a study this fall predicting that at least 700,000 retirees would enter the labor market if the earnings limit were repealed, generating $140 million more in new, work-related taxes than the cost of the additional Social Security benefits that would be paid.