The Labor Supply Effects of SSI

The Supplemental Security Income (SSI) program, which guarantees a minimum level of income for elderly, blind, and disabled individuals, provides a crucial safety net for the low-income elderly. In 2000, the 1.3 million beneficiaries of the aged component of the program received $4.8 Billion in benefits, or an average monthly benefit of over $300. For more than one-third of these beneficiaries, SSI was their only source of income.

The SSI program is means-tested, so that benefits are reduced as family income and assets rise - specifically, most families lose fifty cents in benefits for every dollar in labor earnings and one dollar in benefits for every dollar in non-labor income. For low-income families, the means-testing can discourage work after age 65, the age at which individuals become eligible for SSI. However, SSI can also discourage work before age 65, as one of the reasons to continuing working is to increase future Social Security and pension benefits, and these higher benefits are exactly offset by a reduction in SSI benefits.

In The Effects of Changes in State SSI Supplements on Pre-Retirement Labor Supply, (NBER Working Paper 9851), David Neumark and Elizabeth Powers explore whether SSI affects the labor supply of likely future SSI participants at ages 62-64. In their analysis, the authors make use of the substantial differences in SSI benefit levels across states that result from differences in the state supplements to the uniform federal SSI benefit. For example, the maximum SSI benefit for an elderly couple in 2000 ranged from a low of $769 in the twenty-five states with no supplement to a high of $1,297 in Alaska.

The authors use 1980-2001 data from the Current Population Survey. In their simplest analysis, they compare the labor supply of likely future SSI participants aged 62-64 in high-SSI and low-SSI states. They find no significant difference, but this approach is potentially flawed - workers in different states may work more or less for reasons other than SSI, such as the availability of jobs in their state.

The authors have several clever strategies to get around this problem. The first is to use a control group of workers whose labor supply should be unaffected by SSI, such as younger workers, to measure any difference in labor supply in high-SSI and low-SSI states that is due to other factors and to remove this from their estimate. The new results suggest that SSI does discourage work - a $100 increase in monthly SSI benefits is associated with a 2.8% reduction in the employment rate of likely future SSI participants.

Sensitive to the potential critique that the control group may be less than perfect, the authors also present an analysis that makes use of changes to the level of state supplements over time. Specifically, they test whether the labor supply of likely future SSI participants changes by more in states that increase their benefits than in states that do not. This analysis suggests an even larger effect of SSI on work - a $100 increase in SSI benefits is associated with a 5% reduction in the employment rate.

The authors caution that their results do not necessarily imply that generous SSI benefits constitute poor public policy. Rather, this study highlights the tradeoffs inherent in any social insurance program - providing more generous benefits to help those in need encourages others to alter their behavior so as to become eligible for the program. The authors suggest that the negative labor supply effects of SSI may be heightened by the low income and asset cut-offs for program eligibility. The authors conclude "it is probably worth thinking about alternative ways of structuring SSI that would increase incentives to accumulate economic resources without generating large and costly increases in eligibility for SSI."

This research was supported by the National Institute on Aging. It was summarized by Courtney Coile.
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