- The Washington Times - Friday, February 18, 2000

There he goes again. Bill Clinton is stealing yet another good Republican idea.

This time it's repeal of the Social Security earnings test. Recently suggested by Texas Gov. George W. Bush a few months ago, the idea was included in this year's Republican legislative agenda by House Speaker Dennis Hastert.

The proposal is scheduled for mark-up this week in the tax-writing Ways and Means Committee, Mr. Clinton has decided to endorse it. Just as the train is leaving the station.

The retirement earnings test is a tax on the outside earnings of those who are between the ages of 62 and 70 years old and receive Social Security benefits. Originally conceived during the Depression era when unemployment hovered around 20 percent, the tax creates a powerful work penalty for large numbers of the elderly population.

For example, Social Security recipients between the ages of 65 and 69 who earn more than $17,000 of additional income this year will pay an effective tax rate of 33 percent. This means that nearly 1 million older Americans lose $1 of their Social Security benefits for every $3 of outside income they earn above the $17,000 threshold. A pretty raw deal.

For those under age 65, the story is even worse. For each $2 earned above $10,080, they forgo $1 in their Social Security benefits. This comes to a 50 percent marginal tax-rate on the extra hour worked. So most older folks choose not to work. Remember Arthur Laffer's dictum: If you tax something, you get less of it. Tax something less, however, and you get more of it.

For many years economic studies argued that the retirement earnings test had little impact on the labor supply of older workers. Anyway, the research argued, it was better to induce retirement in order to make room for new younger workers who needed jobs.

However, a new National Bureau of Economic Research study by Leora Friedberg asserts the earnings tax has in fact had a powerful impact by substantially limiting the supply of work from the elderly. Miss Friedberg finds that eliminating the earnings test would raise the working hours of the older age cohort by more than 5 percent. As the exemption threshold rises under current law, the disincentive effect would be even greater.

Alan Greenspan, who is constantly fretting about scarce labor resources, has frequently proposed abolishing the retirement tax. So has Dallas Fed president Robert McTeer, who frets less, but strongly favor sending the tax.

The numbers here are pretty impressive. According to a recent article by the Federal Reserve Bank of St. Louis, in 1998 there were an estimated 19.5 million people between the ages of 60 and 69. Of this group, only about seven million or 35 percent are part of the labor force.

If the tax-cut on retirement earnings induced a third of the remaining 13 million potential workers to re-enter the labor force, the extra 4 million workers could fill more than a year of average non-farm payroll job increases (assuming 250,000 new jobs per month). Each new entering class of 62-year-olds would then supply another year's workers.And so on, and so forth. Without any stress to labor market wage rates.

We need the graybeard veterans. They're well-trained, disciplined and efficient workers. They'll add to productivity. They'll teach the gen-Xers how to tie their ties. They'll teach the sub-gen-Xers the value of showing up on time, or showing up at all. And when they do show up, they're meant to work.

Along with tax-cuts for the gray-haired set, federal policies ought to increase legal immigration levels, including visa permits for high-skilled foreign techies. If folks from distant shores wish to come to America in order to work, produce and prosper, why not let them? Let freedom ring.

In the bad old days of the 1930s, the United States seemed to have too many workers (although in fact we had too many high taxes and tariffs that blocked work and production). Today, we seem to have too few workers. So let's attract more.

Actually, there is some recent evidence from the Labor Department's monthly jobs reports that formerly discouraged workers, senior citizens and immigrants are flowing in to the employment ranks in greater numbers than ever. The household survey of those who wish to work is rising faster at 427,000 over the past three months than the payroll survey (business establishments) increase of 320,000.

And, of course, if labor resources were as scarce as some Federal Reserve members seem to believe, then why is it that average hourly wage-rates have been increasing steadily at around 3.5 percent annually. If there truly were too many jobs chasing too few workers, then wage-rates would be skyrocketing. But they're not. Under the right policies, labor supplies can be highly elastic.

So there's already ample evidence to suggest that the Fed should cease and desist from its anti-growth interest rate tightening policies. Cutting taxes on the elderly by eliminating the Social Security earnings test will supply even more workers, and provide even more reasons, for the Fed to stand pat. If it ain't broke, don't fix it. Do no harm. Bury those Phillips Curves.

As for Mr. Clinton, I love it when he steals good ideas. In the mid-1990s he signed Republican bills to reform welfare, balance the budget, lower the capital gains tax and expand savings accounts. All pro-growth.

Bill Clinton, supply-sider. What a great country.

Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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