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Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers

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  • Laitner, John
  • Silverman, Dan

Abstract

This paper proposes and analyzes a Social Security reform in which individuals no longer face the OASI payroll tax after, say, age 54 or a career of 34 years, and their subsequent earnings have no bearing on their benefits. We first estimate parameters of a life-cycle model. Our specification includes non-separable preferences and possible disability. It predicts a consumption–expenditure change at retirement. We use the magnitude of the expenditure change, together with households' retirement-age decisions, to identify key structural parameters. The estimated magnitude of the change in consumption–expenditure depends importantly on the treatment of consumption by adult children of the household. Simulations indicate that the reform could increase retirement ages one year or more, equivalent variations could average more than $4000 per household, and income tax revenues per household could increase by more than $14,000.

Suggested Citation

  • Laitner, John & Silverman, Dan, 2012. "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," Journal of Public Economics, Elsevier, vol. 96(7-8), pages 615-634.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:7:p:615-634
    DOI: 10.1016/j.jpubeco.2012.02.005
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    Cited by:

    1. Gustman, Alan L. & Steinmeier, Thomas L., 2015. "Effects of social security policies on benefit claiming, retirement and saving," Journal of Public Economics, Elsevier, vol. 129(C), pages 51-62.
    2. Liebman, Jeffrey B. & Luttmer, Erzo F.P. & Seif, David G., 2009. "Labor supply responses to marginal Social Security benefits: Evidence from discontinuities," Journal of Public Economics, Elsevier, vol. 93(11-12), pages 1208-1223, December.
    3. Yongseok Shin & Ananth Seshadri & Rody Manuelli, 2012. "Lifetime Labor Supply and Human Capital Investment," 2012 Meeting Papers 946, Society for Economic Dynamics.
    4. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2011. "The effects of employment uncertainty and wealth shocks on the labor supply and claiming behavior of older American workers," Economics Working Papers 1275, Department of Economics and Business, Universitat Pompeu Fabra.
    5. John Laitner & Daniel Silverman & Dmitriy Stolyarov, 2014. "Annuitized Wealth and Post-Retirement Saving," NBER Working Papers 20547, National Bureau of Economic Research, Inc.
    6. Eric French & John Jones, 2012. "Public pensions and labor supply over the life cycle," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(2), pages 268-287, April.
    7. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
    8. Alpert, Abby & Powell, David, 2014. "Estimating Intensive and Extensive Tax Responsiveness: Do Older Workers Respond to Income Taxes?," Working Papers 987-1, RAND Corporation.
    9. Dotsey, Michael & Li, Wenli & Yang, Fang, 2015. "Home production and Social Security reform," European Economic Review, Elsevier, vol. 73(C), pages 131-150.
    10. Jingjing Chai & Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla, 2012. "Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?," Working Papers wp266, University of Michigan, Michigan Retirement Research Center.
    11. Abby Alpert & David Powell, 2014. "Estimating Intensive and Extensive Tax Responsiveness Do Older Workers Respond to Income Taxes?," Working Papers WR-987-1, RAND Corporation.
    12. John Laitner & Dan Silverman, 2017. "Adjusting the Payroll Tax to Promote Longer Careers," Working Papers wp363, University of Michigan, Michigan Retirement Research Center.
    13. repec:eee:eecrev:v:101:y:2018:i:c:p:512-527 is not listed on IDEAS
    14. Maurer, Raimond & Mitchell, Olivia S. & Rogalla, Ralph & Schimetschek, Tatjana, 2017. "Optimal social security claiming behavior under lump sum incentives: Theory and evidence," SAFE Working Paper Series 164, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    15. Abby Alpert & David Powell, 2012. "Tax Elasticity of Labor Earnings for Older Individuals," Working Papers wp272, University of Michigan, Michigan Retirement Research Center.
    16. Julian Diaz Saavedra, 2013. "Age-dependent Taxation, Retirement Behavior, and Work Hours Over the Life Cycle," ThE Papers 13/09, Department of Economic Theory and Economic History of the University of Granada..
    17. Neumark, David & Song, Joanne, 2013. "Do stronger age discrimination laws make Social Security reforms more effective?," Journal of Public Economics, Elsevier, vol. 108(C), pages 1-16.
    18. repec:eee:hapoch:v1_457 is not listed on IDEAS
    19. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," AMSE Working Papers 1357, Aix-Marseille School of Economics, Marseille, France, revised 21 Nov 2013.
    20. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," Working Papers halshs-00907807, HAL.
    21. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2014. "Reforming the U.S. Social Security system accounting for employment uncertainty," Working Papers 2014-12, FEDEA.
    22. Yuriy Gorodnichenko & John Laitner & Jae Song & Dmitriy Stolyarov, 2013. "Technological Progress and the Earnings of Older Workers," Working Papers wp280, University of Michigan, Michigan Retirement Research Center.

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