Feeling Squeezed? Impact of Social Security Benefit Cuts on Labor Supply and Savings of the Elderly

While there is a general consensus that reforms are needed to improve the financial viability
of the Social Security program, these reforms may have welfare implications — both intended
and unintended — that remain unexamined. I revisit the 1983 Social Security reforms to
examine how a large, potentially unanticipated wealth shock affects elderly workers. I exploit
the nonlinearity in the design of the reforms to estimate causal effects on the labor supply
and on the savings of older workers at different stages of the lifecycle. The identification
highlights the relevance of cohort effects which tend to be assumed away in previous research
Evidence suggests that among men, affected cohorts responded by altering their labor supply,
but only when they were very close to retirement. Women also contributed through increased
labor supply, both at the extensive and intensive margins. In addition, there is evidence that
affected workers also responded through higher savings prior to retirement. Nonetheless,
the Social Security amendments appear to have disproportionate effects, with some lowereducated workers remaining in the labor force in later years. Enhancing public understanding
of the implications of future reforms could mitigate potentially adverse effects particularly
on vulnerable subpopulations.