Is Uncle Sam Inducing the Elderly to Retire?

Social Security was originally created to provide a basic floor for retirees’ living standards. However, many Americans – and in particular an increasing number of Baby Boomers – rely on Social Security as their major source of retirement income. There is a gap between what Social Security can provide at current funding levels, and what Americans expect it to provide. Many Baby Boomers appear at risk of suffering a major decline in their living standard in retirement. Since the government is not likely to expand Social Security in the short term, Baby Boomers should not be discouraged from increasing their lifetime earnings by working harder and longer. In a recent paper, 1 my colleagues and I measure the work disincentives confronted by people aged 50-79, based on an evaluation of the entire array of explicit federal and state taxes and implicit taxes arising from the loss of benefits as one earns more. We find that these work disincentives are much higher than suggested by previous research. Working longer can raise older workers’ living standards, but those additional earnings are effectively taxed at a high rate (typically between 40-60%). Reducing these work disincentives could help increase the lifetime earnings of retirees and thereby reduce poverty rates among the elderly.(This abstract was borrowed from another version of this item.)