Research Note #7:
Brief Legislative History of the Retirement Earnings Test

The 1935 Law

The Economic Security Bill President Roosevelt transmitted to Congress in January 1935 contained the following language: "No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation." This was the retirement earnings test (RET) provision.

The Administration's bill was developed by the President's Committee on Economic Security (CES). The actuarial calculations underlying the Administration's proposal were based on the assumption that a retirement test would be included in the law.

The Economic Security Bill was introduced simultaneously in the House and the Senate on January 17, 1935 and was referred to the House Ways and Means Committee and the Senate Finance Committee. The House Ways & Means Committee held hearings on the bill from January 21, 1935 through February 12, 1935. The Senate Finance Committee held hearings from January 22, 1935 through February 20, 1935.

On April 4, 1935 the Ways and Means Committee reported the bill to the House, without the RET provision, which was removed during Committee consideration. According to the Executive Director of the CES, Professor Edwin Witte, who was present in the closed mark-up sessions:"All actuarial calculations were made on the assumption that annuities would be paid only to employees retiring from active employment, and this was provided in the original economic security bill. The only person to object to this provision was Mr. Beaman. He raised the point that 'active employment' needed to be defined and rejected every attempted definition. . . .It apparently was not realized by anyone that this change would operate to again create a large deficit in the old age insurance fund; in fact, there was no discussion of the financial aspects whatsoever. When the subcommittee made its report to the full committee, its recommendation to eliminate the provision relating to retirement was adopted with discussion. As a result, no provision to this effect was included in the House bill."

On June 12, 1935 the Senate Finance Committee reported its bill to the Senate--with the RET provision. Again according to Witte: ". . . the Senate committee gave some attention to the requirement of retirement which was stricken from the original bill by the House Committee. . . . there was no difference of opinion among the members of the committee. In a public statement given out after passage of the House bill, the President included an item to the effect that retirement, of course, should be a condition of granting of any annuity. This seemed to be taken for granted by all members of the Senate committee . . . This amendment was adopted without any dissent."

The House version of the bill, without a RET, was passed in the House on April 19, 1935 by a vote of 372 to 33. The Senate version of the bill, including a RET, was passed on June 19, 1935 by a vote of 77 to 6.

The Conference met throughout July 1935 and into early August, as a dispute about an unrelated provision forestalled agreement. The House receded to the Senate position on the RET provision. According to Witte: "Later on it was quite readily agreed upon by the House conferees, who explained that the House committee had never understood that the amendment eliminating the requirement of retirement completely upset the actuarial calculations."

The Conference Report was passed by voice vote in House on August 8th and in the Senate on August 9^th. President Roosevelt signed the bill into law on August 14, 1935.

The final version of the Social Security Act of 1935 contained this language on the subject: "Whenever the Board finds that any qualified individual has received wages with respect to regular employment after he attained the age of sixty-five, the old-age benefit payable to such individual shall be reduced, for each calendar month in any part of which such regular employment occurred, by an amount equal to one month's benefit."

There was essentially no discussion of the RET provision in the Congressional floor debates or in the hearings held on the bill. The only known discussions of the provision were those in the mark-up sessions and the Conference.

The 1939 Amendments

The RET in the 1935 law prohibited any Social Security payment when income was earned in "regular employment." "Regular employment" was not explicitly defined. Therefore, in the 1939 Amendments Congress adopted a provision defining retirement as the receipt of less than $15 of earnings in a month from jobs covered under the Social Security program.

The $15 figure represented earnings at about 25 percent of the minimum wage, so it was a measure which necessitated substantial retirement. (The current retirement test exempt amounts, $800 per month for those under age 65 and $1,292 per month for those age 65-69, constitute 90 percent and 145 percent of the current minimum wage, respectively.)

Placing a dollar figure on the RET was done primarily for practical administrative reasons, to clarify with some precision what was meant by "regular employment." This change did not signal any change in the fundamental operation of the RET.

The 1950 Amendments

With the coming of World War II, prices and wages increased dramatically over pre-war levels. However, throughout the War years, the RET had little effect since many older workers remained employed or returned to the workforce rather than retiring, in support of the war mobilization. Following the war, the nation's retirement and pension policies came under new scrutiny and the RET came under increasing criticism. There were obvious problems with the existing test:

• wages levels had risen since 1939 and the $15 figure was outdated;
• the "all-or-none" nature of the test was viewed as excessively harsh, it was thought that a more gradual reduction could facilitate the transition from full-time work, to part-time work, to full retirement;
• some workers, especially among the self-employed, never retired and hence would never be in a position to collect a benefit for their contributions;
• the RET was generally unpopular with those who wanted Social Security to be more like an annuity, payable simply by virtue of attaining retirement age.

Following recommendations of the 1947-1948 Advisory Council, in the 1950 amendments Congress agreed to eliminate the RET starting at age 75 and to increase the threshold from $15 to $50, but to retain the all-or-nothing nature of the test.

The elimination of the RET for those age 75 and older was rationalized as making the program more equitable for the newly-covered self-employed, who, it was argued, tend to not retire and hence they would be unable to benefit from their contributions.

So by 1950, the nature of the Social Security retirement program had been altered on the issue of the RET. From that point on, it was established policy that the RET need not always apply.

The 1952 and 1954 Amendments

Following the outbreak of the Korean War, wages and prices again soared. The administration and the Congress realized that an adjustment in the RET earnings level was in order. In the 1952 Act the exempt amounts were raised, but no other significant changes were made.

The 1954 amendments again made significant changes in the RET. Wages were put on an annual test. This was a considerable liberalization because it meant one could earn over the monthly exempt amount for several months each year without any loss of benefits provided the total earnings stayed under the annual exempt amount. However, the test was still "all or none," with the full benefit withheld when the limits were exceeded. The exempt amount was raised and the age at which the RET no longer applied was reduced from 75 to 72. The argument again was one of equity; that lowering the RET cap would make the program fairer to self-employed farmers, who were being covered for the first time.

The 1960 Amendments

The 1960 Amendments brought another key change in the operation of the RET. For the first time, earnings over the exempt amount did not always produce a total loss of benefits. For earnings between $1,200 and $1,500 the reduction was $1 for every $2 of earnings. For earnings over $1,500 the old rule applied. This was done to alleviate the perverse result of earnings above the exempt amount sometimes yielding a net decrease in income, compared with simply earning up to the exempt amount. From this point forward, the RET would utilize this principle.

The 1972 Amendments

The 1972 amendments introduced another important innovation-the Delayed Retirement Credit (DRC). This credit increases the benefit amount for those workers who delay retirement past the Normal Retirement Age (NRA). The credit was initially set at 1 percent per year. The 1983 amendments raised this credit to an eventual level of 8 percent (by 2009).

DRCs were added to the law as a partial offset to the RET. The argument was one of fairness. It was argued that if program participants continue to work after 65, and forgo benefits due to the RET, it is only fair that they receive some additional compensation for their extra work.

The 1972 act introduced one other very important innovation. Previously, the RET exempt amounts were only raised when a specific act of Congress mandated an increase. The 1972 law put the increases "on automatic" by tying them to increases in average earnings, starting in 1975.

The 1977 Amendments

The 1977 amendments brought considerable legislative activity surrounding the RET. The House passed a bill eliminating the RET at age 65. The Senate passed a similar bill setting the end age at 70. The Conference accepted the Senate position and the final legislation ended the RET at age 70, effective in 1982. (An amendment in 1981 later pushed the effective date back to 1983 due to short-term cost concerns.)

The 1977 law also separated the cohort aged 62-64 from the 65-69 cohort, creating a more generous RET for the second group.

Changes in the 1980s

The major change to the RET in the 1980s was included in the 1983 Amendments which increased the offset from $1 for every $2 of excess earnings to $1 for every $3-but only for the NRA cohort. Even though this change was legislated in 1983, its effective date was 1990. This was because the thrust of the 1983 Amendments was to address short-range solvency problems and Congress did not want provisions such as this one, which had a programmatic cost, from taking effect during the 1980s while solvency was being restored.

1996 Legislation

Following the 1972 changes in the law, increases in the exempt amounts were no longer determined solely by legislative act but were indexed to increases in average wage levels in the economy. This had the dual effect of providing regular increases and of constraining the level of those increases. However, the Contract with America Advancement Act of 1996 made another departure from the indexing by again making ad-hoc increases in the exempt amounts for the NRA cohort. A schedule of increases were programmed into the law which dramatically raised the exempt levels. Indeed, the value of the exempt amount was more than doubled.

Also, this second set of ad-hoc increases for the NRA cohort had the effect of increasing the disparity between this cohort and the age 62-64 cohort. Under the 1977 law, the exempt amount for the 62-64 group was 72% of that for the NRA cohort in 1995. Under the estimates in the 1996 law, the percentage would fall to 35% by 2002.

Repeal in 2000

In his January 1999 State of the Union Address, President Clinton stated that "we should eliminate the limits on what seniors on Social Security can earn." On March 1, 2000, the House of Representatives approved an earlier version of H.R. 5. The Senate approved an amended version of the legislation on March 22, 2000. The House agreed to the Senate amendment to the legislation and cleared the measure for transmission to the President on March 28, 2000. The votes were unanimous in both houses of Congress.

At a signing ceremony on April 7, 2000, in the Eisenhower Presidential Room of the Old Executive Office Building, President Clinton signed the bill into law.

Larry DeWitt
SSA Historian's Office
April, 2000