The Effects of the Taxation of Social Security Benefits on Older Workers’ Income and Claiming Decisions

Social Security benefts are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage the labor supply of older workers and affect the decision to claim benefts. Using a nonparametric graphical methodology, this paper investigates whether older taxpayers reduce income to avoid the tax. While previous research found that the labor supply of older workers is signifcantly affected by the Social Security earnings test, we fnd little evidence of a response to beneft taxation in a large panel of data compiled from individual income tax and information returns. Similarly, while taxation of benefts provides an incentive for many to delay claiming, we fnd no evidence of such an effect. Overall, the fndings suggest that older taxpayers have little understanding of the rules governing Social Security beneft taxation.