The Effect of the SSI Program on Labor Supply: Improved Evidence from Social Security Administrative Files

Abstract

We use public-use microdata linked to Social Security Administration records to reexamine the impact of the Supplemental Security Income program on work disincentives among older individuals nearing the age of eligibility for Supplemental Security Income for the aged and likely to use the program. The administrative records provide significant advantages relative to past research and yield strong evidence that the Supplemental Security Income program induces some individuals nearing the age of eligibility to reduce their labor supply. Summary The Supplemental Security Income (SSI) program for the aged offers income support for the population aged 65 and older that has low income and few assets. Although the incentive effects of other income support programs have received a good deal of attention, the potential incentive effects of the SSI program have received far less. Because eligibility for this program is conditioned on an income test and an asset test, the incentives embedded in the program could lead individuals to reduce both labor supply and saving at ages leading up to eligibility for the aged component of the program. Past research by the authors has found evidence that older men approaching the age of eligibility who have a relatively high likelihood of participating in the SSI program are more likely to reduce their labor supply and saving. This research used publicly available data that had some important limitations, however. First, inferences had to be made about the likely future participation in the aged component of the SSI program of younger individuals using models of the participation behavior in the program of older individuals (aged 65 or older) from earlier cohorts. Second, the data could not distinguish SSI participation based on age compared with participation based on disability, undermining the accurate prediction of SSI-aged participation. This article uses confidential Social Security Administration data on earnings histories and SSI recipiency that were linked to multiple panels of the Survey of Income and Program Participation to reexamine the labor supply incentive effects of SSI during the period between 1984 and 1993. This article has two goals: to provide improved estimates of the work incentives (or disincentives) posed by the SSI program, and to highlight some of the unique advantages of incorporating Social Security's administrative data into the study of the behavior of older workers, perhaps thus inspiring more researchers to work with these data. The key policy parameter relied upon for the theoretical arguments and empirical implementation is the generosity of the SSI benefit. In particular, states may supplement the basic federal SSI benefit, and this supplementation is the major source of independent variation in policy. A simple two-period theoretical model was developed to derive empirical hypotheses. The major theoretical predictions are that more generous SSI benefits either have no effect on labor supply before the age of eligibility or cause a decline in that labor supply. Further, an increase in SSI generosity increases the lifetime utility associated with participation in the SSI program. Since all choices involving participation in the program are associated with lower levels of labor supply, labor supply is unambiguously lower when the program is more generous. The basic testable hypothesis is that, all else being equal, increased SSI generosity is associated with a lower level of labor supply for those who might find participation in the program attractive in old age. The basic sample consists of men aged 40 to 64 in the panels from 1984, 1990, 1991, and 1993 of the Survey of Income and Program Participation. These observations are linked to administrative data on earnings, covered employment, and participation in the SSI program. A series of difference analyses are conducted that compare the behavioral response to SSI benefit levels of likely and unlikely participants and older (aged 60 to 64) and younger (aged 40 to 59) men. …

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