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A Quick and Easy Way to Grow the Workforce

We recently looked at a new Federal Reserve Bank analysis that found that virtually all of the current labor shortage could be explained by a pandemic-induced increase in baby boomer retirements. Could Congress take steps to encourage some of these retired workers to return to the workforce? Yes.
While some of the retirees have no need or desire to return to the workforce, many others may have been pushed out due to pandemic-related state lockdowns or companies offering retirement packages. Some portion of those retirees may want or need to work, but federal policies discourage that return.
Indeed, the government initially imposed work restrictions on Social Security during the Great Depression to push seniors out of the workforce to open up jobs for younger, unemployed workers. While those restrictions may have made sense in the past, they no longer do. Congress has relaxed or removed most, but not all, of them. Here’s three policies that need to change.
The Social Security earnings penalty. Seniors can begin taking Social Security as early as age 62. But Social Security imposes an earnings limit up until the time that senior reaches the government-set full retirement age, which is currently 66 years plus some months. (See this timeline.)
The 2023 Social Security earnings limit for those who have not yet reached full retirement age is $21,240. Social Security will withhold $1 from the person’s Social Security benefits for every $2 the senior earns above that limit. In essence, a 50 percent withholding tax on benefits above the earnings limit.
Social Security will boost seniors’ monthly benefit after reaching the full retirement age in an effort to make them whole. But if a senior dies, that withholding is forfeited.
Well over half of seniors take Social Security benefits before reaching the full retirement age, and 30 percent take it at age 62, usually because they lost their job or just need the additional income. But the government penalizes them if they return to work.
If Congress were to eliminate the earnings penalty on early retirement, perhaps millions of seniors would return to the workforce.
The government taxes Social Security benefits. Seniors receiving Social Security benefits but continuing to work must pay normal taxes on their earned income, plus taxes on up to 85 percent of their benefits for individuals earning more than $25,000 and joint filers earning more than $32,000.
Seniors may refuse or limit their work to avoid paying taxes on their benefits. Eliminating that tax, or raising the threshold significantly, could encourage more to reenter the workforce.
Working Medicare beneficiaries pay higher Medicare premiums. The vast majority of seniors age 65 years and older are on Medicare, and most voluntarily opt to include Medicare Part B (physician expenses) and Part D (prescription drugs). Medicare charges a premium for both Parts B and D, and those premiums rise if seniors have income. While the income thresholds are much higher than Social Security’s, they can still deter working.
Eliminating or increasing Part B and D earnings thresholds could encourage even more seniors to work.
If Congress wants to expand the workforce, it needs to recognize that taxes and penalties matter. Reducing those imposed on seniors would result in an expansion of the labor force.