Partial retirement and the earnings test

This paper studies the effects of the earnings test on retirement behavior. The earnings tests of most social security systems tax post0retirement earnings at a relatively high level and do not lead to actuarially fair increases in futere benefits. This results in discouragement of partial retirement. The paper shows that a reduction in the earnings test's tax rate is likely to increase part-time work, and that, in special cases, the increase in work effort may even lead to a reduction in the net transfer from social security to the individual.I wish to thank the Institute of Industrial Relations at UC Berkeley for its hospitality and support. This research has been financed by the Austrian Fonds zur Förderung der wissenschaftlichen Forschung. I am indebted to J. K. Brunner, W. T. Dickens, J. Falkinger, E. Lazear, T. Sikor, B.-A. Wickström, R. Winter-Ebmer, and two referees for comments on an earlier draft.