What can the Social Security Notch tell us about the impact of additional income in retirement?

Article type: Research Article

Authors: Handwerker, Elizabeth Weber^{a; *}

Affiliations: [a] Research Economist, Employment Research and Program Development Staff, U.S. Bureau of Labor Statistics, 2 Massachusetts Ave, NE, Washington, DC, USA

Correspondence: [*] Corresponding author. Tel.: +1 202 691 7353; Fax: +1 202 691 7425; E-mail: handwerker_e@bls.gov

Abstract: For researchers interested in the impact of income on life outcomes, the 'Social Security Notch' provides a rare source of variation in incomes not caused by these same life outcomes. This paper addresses the usefulness of this variation to researchers. First, it demonstrates that simulated benefit levels by cohort are very significant predictors of reported benefits and total incomes for the affected cohorts in large data sources, such as the Current Population Survey. Second, it examines whether these are large enough to disentangle the impact of changes in income from underlying cohort variability in outcomes. It shows that the cohorts with higher benefits due to law changes are also observed to have higher earned incomes in retirement. Furthermore, the difference in mortality rates between affected cohorts is similar in magnitude to the gaps between other successive cohorts. These results imply that cohort variability overshadows the effects of this potential instrument.

Keywords: Social Security Notch, income variability, valid instruments, cohort variability, mortality, D31, J26, J11, C36

DOI: 10.3233/JEM-2011-0338

Journal: Journal of Economic and Social Measurement, vol. 36, no. 1-2, pp. 71-92, 2011