Government Old-Age Support and Labor Supply: Evidence from the Old Age Assistance Program (WP-16-02)
Daniel K. Fetter and Lee Lockwood
Many major government programs transfer resources to older people implicitly or explicitly tax their labor. In this paper, Fetter and Lockwood shed new light on the labor supply effects of such programs by investigating the Old Age Assistance Program (OAA), a means-tested and state-administered pension program created by the Social Security Act of 1935. Using newly available Census data on the entire U.S. population in 1940, they exploit the large differences in OAA programs across states to estimate the labor supply effects of OAA. Their estimates imply that OAA reduced the labor force participation rate among men aged 65–74 by 5.7 percentage points, nearly half of its 1930–40 decline. Estimating a structural model of labor supply, they find that the welfare costs to recipients of the high tax rates implicit in OAA’s earnings test were quite small. Predictions based on their reduced-form estimates and the estimated model both suggest that Social Security could account for at least half of the large decline in late-life work from 1940 to 1960.