Special Study #7:

The History and Development of the Social Security Retirement Earnings Test

by Larry DeWitt,
SSA Historian

In his 1999 State-of-the-Union address, President Clinton announced his support for the idea of eliminating the Social Security Retirement Earnings Test (RET). The RET is unpopular with beneficiaries who want to have their retirement benefits and continue to work. Eliminating the RET has long been a favorite proposal in Congress. With the President's support, it is likely that the RET will soon undergo historic change. This paper examines the role and development of the RET; how it came to be part of the Social Security program, why it was created and how it evolved over the years.

The Social Security Act of 1935

The Social Security Act of 1935 contained two programs of economic security for the aged: Title I of the Act provided non-contributory, means-tested, old-age pensions , in the form of state welfare programs with federal funding. Title II of the Act, what is now thought of as Social Security, provided old-age insurance through a contributory social insurance scheme. The old-age insurance program required retirement from gainful employment as a condition of benefit receipt. For wage earners, this requirement was and is measured primarily by a test of earnings levels, hence the RET. The RET is simply the administrative form of the principle that one must be retired in order to collect retirement benefits from Social Security's old-age insurance program. The exact form of this requirement has changed considerably over the years, as we shall see, but the general principle has characterized the program from its inception.

The Retirement Test

In 1991 the House Ways & Means Subcommittee on Social Security held a hearing on the Social Security retirement test. Many of the witnesses testified in favor of repealing the RET, and several agreed with the observation of a senior Congressman from Arizona who stated: "Social Security, when it was created in 1935, sought to achieve two goals-moving older workers out of the work force to make way for younger workers, and to partially replace lost income due to retirement. Those goals were applicable in 1935, but are not in 1991." (1) Around the same time, a member of Congress from California authored a column in the Los Angeles Times in which he stated: "So how did this regressive and unproductive test become policy? It was born out of Depression-era reforms in 1935 to create jobs during the most grim economic period in U.S. history. Millions of older Americans were discouraged from staying employed. The earnings test reduced their overall income, making it unproductive for them to work beyond retirement age. This meant younger workers with families could have jobs." (2) A recent monograph for the Third Millennium group put it this way: ". . . the paramount short-term factor in Social Security's birth-the Great Depression . . . For the short term, it was considered imperative to get the elderly out of the job market. . . Social Security still carries out this Depression-fighting aim, despite the fact that there is no longer any goal to be served by pushing seniors out of the workforce." (3)

This idea about the origins of the RET is very common and is often advanced in discussions about the RET.(4) Essentially, it attributes the rationale for the RET to a set of unique economic circumstances prevailing during the Great Depression and to a supposed industrial policy of removing older workers from the workforce during that period. The gist of the argument is that since this set of economic circumstances no longer obtains, and the industrial policy objective is no longer desirable, there is no present rationale for the inclusion of the RET in the Social Security program.

The problem of the "superannuated worker" is a traditional one in industrial policy and pension theory. Since the onset of the Industrial Age, older workers began to find themselves at the end of their productive working lives, often without means of support. Such older workers often tried to remain employed and employers sometimes tried to find ways to move them out of the workforce. So the idea that this industrial policy objective underlies the RET, has an initial plausibility. But it is, as we will see, largely a historical myth which has grown over time and assumed the status of "common knowledge."

The retirement decision is a complex, multi-variate phenomenon, involving considerations of health, lifestyle, workplace circumstances and psychology, as well as economics. Whether any single economic incentive, such as the RET, could have a major impact on this decision is still an open question, with the available evidence inconclusive.(5) In any case, that question is beyond the scope of this paper. We are concerned only with whether the RET could plausibly have provided such incentive effects in the context of the mid-1930s, and whether or not such incentive effects were part of the intentions and goals of the program's designers.

The Purpose of the Retirement Test

Under social insurance theory, the rationale for the RET is simple and straightforward: one must retire in order to receive a retirement benefit because loss of earnings due to retirement is the insured condition. The risk-sharing inherent in insurance schemes rests on this principle. Under the alternative interpretation, the purpose of the RET is to force a choice on the aged worker: keep working and forgo the benefit or leave the workforce in order to collect a Social Security retirement benefit. According to the hypothesis, the RET was introduced into the Social Security Act of 1935 because the designers of the program were motivated, at least in significant part, by the industrial policy objective of removing older workers from the workforce in order to make room for unemployed younger workers.

This hypothesis is closely tied to the economic and social circumstances of the Depression. We can conceive of times when the demographics of the workplace are quite different. What becomes of this idea when there is low unemployment, high productivity, low numbers of older workers in the workforce and a small pool of willing older workers outside the workforce seeking to get back in? In other words, how would we view the RET in a world where we had no need to either encourage or discourage workforce participation by older workers? Presumably, there would be no need either to have or not have a RET in such a world, from the perspective of industrial policy. And yet, from the perspective of social insurance theory, we might still argue that the principle of the RET is applicable. We might still argue that both on grounds of risk-sharing, and of philosophical principle, that we should not pay insurance benefits to covered individuals who have not suffered the requisite loss of income.

This points up an important distinction. If superannuated workers remain in the workforce because they have no alternative means of income security, then providing a retirement pension fulfills an unmet social need. Certainly, much of the rhetoric of the social insurance movement suggests this as a motive. Also, the social insurance movement sought to prevent dependency in old age, meaning to prevent the social catastrophe of older workers leaving the workforce, for whatever reasons, without adequate means of post-employment income security. This too was a major part of social insurance theorizing and a major part of the rhetoric of the creators of the Social Security program. Neither goal has anything to do with industrial policy. On the other hand, if older workers remain in the workforce because they do not want to retire, but the offer of a retirement benefit induces them to do so, then this is an expression of industrial policy. So the question is, which of these visions of the world did the designers of the Social Security program have in mind in 1934-35?

The Depression and the Potential Impact of Social Security

The notion that the RET was put in the Social Security Act of 1935 in order to move older workers out of the workforce, rests on four premises:

1. In the early 1930s there were large numbers of older workers in the workforce;
2. There were large numbers of young unemployed workers who were being blocked from job opportunities by the presence of older workers;
3. The provisions of the 1935 Social Security Act would serve as an effective incentive encouraging older workers to leave the workforce;
4. This industrial policy objective was a major reason for adopting the RET in 1935.

The number of aged workers outside the workforce seeking to get back in was also very small. Of the 3,187,647 workers in 1930 out of work and seeking employment, barely 133,815 were age 65 or older.(7) Older unemployed workers also stayed out-of-work much longer than younger workers (see Table 2).

1. The RET will encourage older workers to leave the work force;
2. The absence of the RET would encourage older workers to stay in the work force;
3. The primary purpose of the RET is the social insurance principle of replacement of lost income.

• wages levels had risen since 1939 and the $15 figure was outdated;
• the "all-or-none" nature of the test was viewed as excessively harsh, it was thought that a more gradual reduction could facilitate the transition from full-time work, to part-time work, to full retirement;
• some workers, especially among the self-employed, never retired and hence would never be in a position to collect a benefit for their contributions;
• the RET was generally unpopular with those who wanted Social Security to be more like an annuity, payable simply by virtue of attaining retirement age.