Discussion of ”Earnings Adjustment
Frictions: Evidence from the Social
Security Earnings Test” by Gelber, Jones
and Sacks.
Håkan Selin (IFAU, Uppsala)
Workshop on the incidence and labour market
effects of social security contributions, IFS, London,
February 29, 2016
Summary
• AET reduces OASI benefits as a function of the individual’s
earnings above an exempt amount. Well known that
claimants bunch at the exemption level.
• Clear evidence of delay in responses to policy reforms indicate
adjustment costs.
– Lower reduction rates (1989-1990).
– The abolishment of the AET when moving from age 69 to age 70.
– Most of the adjustment occurs within three years.
• Gelber et al. use the policy variation to estimate the elasticity
and a fixed adjustment cost simultaneously.
• In the baseline the elasticity is 0.35 and the fixed cost $280.
• Gelber et al. get remarkably similar results in a dynamic
model.
My view
• Significant contribution to point identify adjustment costs and
elasticities simultaneously (c.f. Chetty (2012) “bounds
paper”).
• Very impressive paper, which now also has a dynamic
extension.
• I appreciate the combination of transparent graphical
evidence and numerical techniques.
• Key issue: how context dependent is the approach?
What if there is no bunching?
• Footnote 18, p. 16: ”If adjustment costs are large enough [...]
frictions eliminate bunching entirely. Since we observe bunching in
our empirical setting, we ignore this case.”
• But: the AET is probably the only U.S. kink where wage earners
bunch.
– Bastani and Selin (2014) examined a very large and salient kink in Sweden,
and found no bunching among wage earners.
– Similar evidence from other countries.
• Wildly believed that adjustment costs in general are large relative to
the structural elasticities => difficult to get at the structural
elasticity with bunching techniques.
• How valuable is the Gelber et al. method in contexts where there is
no bunching?
Suggestions
• Simulate data from the model and estimate more conventional
models (e.g. Gruber & Saez models).
– Do adjustment costs bias the elasticity estimates a lot?
– How important is the size of the tax change with fixed adjustment costs?
– Are responses to increases/decreases in marginal tax rates asymmetric?
• At what value of the (constant) adjustment cost is bunching
eliminated?
– Topic for numerical simulations.
– Interesting figure since bunching is uncommon in other contexts.
• Could you use the abolishment of the AET for NRA in 2000 for
estimation and/or out-of-sample predictions?
Other points
• Are there reasons to believe that elderly workers exhibit lower
adjustment costs or larger within period Hicksian elasticities than
other groups of the population?
– The discussion on external validity is now very general in the paper, and
could be made more specific.
• Why are the excess masses in Figure 2 asymmetric to the left?
– A “white noise” optimization error (c.f. Hausman tradition) would lead to a
symmetric hump around the kink.
– If the variance is sufficiently large bunching is eliminated.
– A fixed cost cannot explain why someone deviates from the kink
conditional on having paid the fixed costs.
– Would it, in principle, be feasible to estimate moments of a distribution of
optimization errors in this framework?
Smaller point
• Valuable with more description of the entire earnings
distribution, which is now graphed very locally around the
exemption amount.
– Distributions of claimants vs. non-claimants.
– No hole in the distribution at the non-convex kink where the entire
OASI benefit has been phased out?