- The Washington Times - Thursday, May 3, 2001

Its not easy taking early retirement these days. Consider, for example, Robert and Doris, a couple who live in Texas. Robert, an engineer who decided to take an early retirement package, was enjoying shuffling his grandchildren around and spending quality time with his computer. However, his company found it still needed his skills and experience to finish a major project and implored him to come back for several months as a consultant not uncommon for those accepting early retirement. Robert reluctantly acquiesced. His wife, Doris, who works part-time in a small family-owned business, also found herself in a pinch. The owner began experiencing health problems and had to take some time off. Doris was asked to fill in the gap. As a result of their sacrificial efforts, Robert and Doris are being financially punished by Social Security just like thousands of other early retirees.

Last year, Congress took an important step for both seniors and the economy: It voted unanimously, in both the House and Senate, to end the Social Security earnings limit for seniors age 65 and older. The earnings limit penalizes retirees who earn more income than the government allows by withholding a portion of their Social Security benefits. As welcome as that move was, workers age 62 through 64 who decide to take early retirement, like Robert and Doris, are still penalized with an earnings limit tax that is even more onerous than the one Congress eliminated.

The original earnings limit was created with the passage of Social Security in 1935 to fulfill social policy, not economic policy. Jobs were scarce during the Great Depression, and the earnings limit was intended to encourage retirees to leave the work force to open up jobs for younger workers. Before its repeal, seniors age 65 and over could earn up to $17,000 a year without penalty. For every $3 seniors earned above $17,000, they forfeited $1 in Social Security benefits. In other words, seniors faced a 33 percent marginal tax rate on every dollar they earned above $17,000. And, of course, like younger workers, they still faced standard income and payroll taxes. But the earnings limit for early retirees age 62 through 64 remains in place and it is far more punitive. For the year 2001, the threshold is $10,680 much lower than the $17,000 those 65 and older faced before the earnings limit on them was repealed. Early retirees who work will have their Social Security benefits reduced $1 for every $2 they make above the limit an effective 50 percent marginal tax rate. The earnings limit on early retirees is a huge disincentive to work. According to the Social Security Administration, 581,000 early retires, ages 62 through 64, reported earnings in 1997, with about 496,000 reporting earnings of $10,000 or less (the earnings limit was $8,640 in 1997). Thus about 85 percent of early retirees opted to keep their earned income close to or below the earnings limit.

When one considers the effective marginal tax rate these early retirees face, it´s easy to see why they limit their work. According to their tax bracket, early retirees could easily lose more than a dollar for each dollar they earn above the $10,680 threshold.

m An early retiree in the 15 percent tax bracket would have to pay a 15.3 percent payroll tax in addition to the 50 percent earnings penalty, for a total marginal tax rate of 80.3 percent.

m An early retiree in the 39.6 percent tax bracket, with a 15.3 percent payroll tax and a 50 percent earnings penalty, would face a total marginal tax rate of 104.9 percent.

Robert and Doris worked and paid into Social Security their whole lives. Yet the government withholds the benefits they deserve simply because they continue to be productive members of society. This is wrong and it has to stop.

While it may have made sense to impose a Social Security earnings limit in 1935 when Congress created the program, it makes no sense today. Congress made the right decision in ending the earnings limit facing seniors ages 65 to 70. Now it´s time to do the right thing for early retirees.

Pete Sessions is a Republican congressman from the 5th District in Texas. Mr. Merrill Matthews Jr. is a visiting scholar with the Institute for Policy Innovation and policy director for the American Conservative Network.

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