THE EFFECT OF OLD AGE ASSISTANCE ON RETIREMENT: Introduction

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The labor force participation of older men has been falling for several decades. While there is some controversy over whether the decline began as early as the late 1800s or as late as the late 1930s, the decline since the 1930s has been dramatic. The labor force participation rate of men 65 and over fell from 54.0% in 1930 to about 19.3% in 1980. Economists have devoted considerable attention to trying to explain the trend towards earlier retirement over recent decades – mainly since the 1970s. Much of the focus has been on Social Security, but many papers have found it has a small or negligible role. Other researchers have argued that the proliferation of defined benefit pension plans create strong incentives for older workers to withdraw from the labor force.

However, while Social Security benefits and private pensions are the main source of income for the elderly today, another public transfer program dwarfed Social Security before 1950. Old Age Assistance (OAA) was a means-tested program for people 65 and older established by the same 1935 legislation that created Social Security. By 1940, 22% of the aged population was receiving OAA – an extremely high recipiency rate by the standards of today’s welfare programs. Social Security payouts began to exceed those from OAA only during the 1950s. Thus, the heyday of OAA coincides with the early stages of the modern decline in elderly labor force participation and may have played a significant role.

In later years OAA gradually shrunk and was replaced in 1974 by the current Supplemental Security Income (SSI) program. The scope of SSI is not nearly as broad as Social Security, but SSI remains the primary source of support for the poorest elderly today. However, lacking studies of SSI’s impact on labor force participation, little can be said about the potential consequences of recent retrenchments in the SSI program. It is difficult to predict the extent to which cuts in eligibility or benefits would be met by increases in labor supply among potential recipients, rather than reductions in elderly income and/or increases in community and family support.