Retirees now likely to be spared a punishing 'tax'

A bill hurtling toward approval would end the earnings cap for the Social Security set.

On one issue, Congress, President Clinton, Democrats, and Republicans sang together like a barbershop quartet last week,

Their tune: End Social Security's retirement-earnings limit.

The unusual nonpartisan harmony in Washington makes it most likely that 65- to 69-year-olds will be able to earn as much as they like this year without losing any Social Security benefits.

Prospects for a bill eliminating the limit are "golden," says Trent Duffy, a House Ways and Means Committee spokesman. It sailed through a subcommittee markup unanimously in 47 seconds last Wednesday.

"It was like the Kentucky Derby," recalls Mr. Duffy. A bang of the gavel by the chairman of the Social Security subcommittee, E. Clay Shaw Jr. of Florida, and it was approved.

The Republican legislator turned to the ranking Democrat, Robert Matsui of California, and said: "You are a much better friend than you are an enemy."

Under present law, Social Security benefits are reduced by $1 for every $3 earned above $17,000. That rule cost about 800,000 recipients all or some of their benefits last year, Social Security Commissioner Kenneth Apfel told House lawmakers last week.

To some of these seniors, the benefit loss feels like a 33 percent tax on top of the income and payroll taxes they already pay on their wages. The total burden could reach 65 percent for higher-paid seniors.

Yet, in the long run, the earnings limit provides Uncle Sam with virtually no added revenue. That's because those who lose some benefits get them back as an increased Social Security retirement benefit if and when they reach 70.

Ending the limit means seniors won't have to play "the life-expectancy lottery," says Duffy.

The restriction is a "perverse policy," says Leora Friedberg, an economist at the University of California, San Diego. They distort the retirement/work choice of seniors. Many older people decide to work only until they reach the $17,000 earnings level, or not work at all.

If the bill passes, the Social Security Administration will pay an additional $22.7 billion in benefits over the next 10 years. Ultimately, that amount will be offset by lower benefits thereafter since those getting more benefits now won't be entitled to delayed-retirement credits later.

It means part of the Social Security revenue surplus will be used to pay extra benefits - and not cover federal deficits caused by spending on highways or other federal programs, as has been the case for years.

"What a beautiful thing!" says Duffy.

The bill will be retroactive to Jan. 1. Mr. Clinton said he would sign it if it's not linked to any other measure. The bill could pass the House early next month. Prospects in the Senate are also seen as excellent.

To Ways and Means Committee Chairman Bill Archer, passage of the bill would be a special delight. The second bill the Texas Republican introduced when he was first elected to the House in 1971 aimed at eliminating the earnings test. He retires from the House this year.

Why all the sweet concord? One reason is the tight labor market. Only 4 percent of the labor force is unemployed.

"The earnings test is not only depriving American businesses of labor they desperately need, but is keeping out of the labor force some of our best-educated and most-experienced workers," Bruce Bartlett, a fellow at the National Center for Policy Analysis, told the subcommittee.

Idleness by retirement, he added, can harm the self-esteem and health of older workers.

Academic studies years ago concluded that the earnings limit had little impact on seniors' decisions to work or not.

But Ms. Friedberg, taking statistical advantage of boosts in the limit in recent years, found that seniors did indeed react to the perceived extra tax on their earnings. Many worked just up to the limit and then quit.

She calculates that those seniors working regardless of the earnings limit would work enough extra hours to add the equivalent of 70,000 full-time workers to the labor force. Maybe others would decide not to retire at 65.

That's not a huge number. Some 250,000 to 350,000 nonfarm jobs are being added monthly to business payrolls.

Nonetheless, the National Association of Home Builders, the National Restaurant Association, and other business groups cheer the prospect of extra workers.

Another reason for the legislation's good prospects is support of the AFL-CIO. "A good thing to do," says David Smith, policy spokesman for the labor federation. Last year, the idea got a more lukewarm reception.

Two facts: Those age 70 and over are already not subject to the test. There is no change for those 62 to 64. Experts fear that ending the test for this group would encourage early retirement with its lower Social Security benefits.

(c) Copyright 2000. The Christian Science Publishing Society