Increase in the supply of labor by encouraging senior citizens to remain in the labor market
"A surprise for seniors," U.S. News & World Report, March 13, 2000
In March 2000, the U.S. Congress unanimously voted in favor of a new law for senior citizens, which will have a significant impact on the supply of labor. Before then, senior citizens below the age of 70 would lose $1 of Social Security retirement income for every $3 of earned income above $17,000. This means that for these seniors, $3 of income was worth $2, which was further reduced by the requisite income tax. This did not give any incentive for seniors to remain in the labor force, and many of them simply stopped working at the of age 65. This eliminated a significant portion of experienced workers from labor force. The new law rectifies this predicament. Seniors now can fully participate in the labor market without losing any Social Security retirement income, which they have paid in while working. The new law with an elimination of the earlier "earnings test" will cost the government $23 billion over next ten years, although income taxes to be paid by these working seniors will cover part of the cost.
During the recent booming economy, America experienced such a shortage of labor, especially in the high tech industry, that the country introduced a new law which brought computer specialists from abroad as "special guest workers" without waiting up to five years to obtain an immigrant visa. This is one way to solve a temporary labor shortage. Encouraging senior citizens to remain in the work force is another solution for the labor shortage. However, the latter is politically more expedient. Since these seniors are Americans, there are no political problems as are often associated with the introduction of foreigners into America. In addition, unlike foreign guest workers, many of whom repatriate a significant part of their earnings in America to their home countries, all the earnings of the senior citizens remain in America.
Senior citizens, most of whom have completed the financial obligations of raising and educating their children, as well as paying mortgages on houses, tend to spend most of their income for current consumption, such as travel or dining out, i.e., they have a high propensity to consume. As a consequence, their income is more widely recycled in the economy, and through the income multiplier effect, a much larger income than the incomes of the seniors will be generated in the economy. All these benefits made the Congress unanimously approved the current change to the Social Security income test.