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Is Uncle Sam Inducing the Elderly to Retire?

In: Tax Policy and the Economy, Volume 31

Author

Listed:
  • Alan J. Auerbach
  • Laurence J. Kotlikoff
  • Darryl Koehler
  • Manni Yu

Abstract

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.
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Suggested Citation

  • Alan J. Auerbach & Laurence J. Kotlikoff & Darryl Koehler & Manni Yu, 2016. "Is Uncle Sam Inducing the Elderly to Retire?," NBER Chapters, in: Tax Policy and the Economy, Volume 31, pages 1-42, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13866
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    References listed on IDEAS

    as
    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. Alicia H. Munnell & Steven A. Sass, 2008. "The Decline of Career Employment," Issues in Brief ib2008-8-14, Center for Retirement Research, revised Sep 2008.
    3. Leora Friedberg, 2000. "The Labor Supply Effects of the Social Security Earnings Test," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 48-63, February.
    4. Congressional Budget Office, 2014. "The Distribution of Household Income and Federal Taxes, 2011," Reports 49440, Congressional Budget Office.
    5. Alan J. Auerbach & Laurence J. Kotlikoff & Darryl R. Koehler, 2016. "U.S. Inequality and Fiscal Progressivity: An Intragenerational Accounting," NBER Working Papers 22032, National Bureau of Economic Research, Inc.
    6. Jagadeesh Gokhale & Laurence J. Kotlikoff & Alexi Sluchynsky, 2002. "Does it pay to work?," Working Papers (Old Series) 0206, Federal Reserve Bank of Cleveland.
    7. Jonathan Gruber & David A. Wise, 1999. "Introduction to "Social Security and Retirement around the World"," NBER Chapters, in: Social Security and Retirement around the World, pages 1-35, National Bureau of Economic Research, Inc.
    8. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    9. Congressional Budget Office, 2014. "The Distribution of Household Income and Federal Taxes, 2011," Reports 49440, Congressional Budget Office.
    10. Amy Finkelstein & Nathaniel Hendren & Erzo F. P. Luttmer, 2019. "The Value of Medicaid: Interpreting Results from the Oregon Health Insurance Experiment," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2836-2874.
    11. Congressional Budget Office, 2014. "The Distribution of Household Income and Federal Taxes, 2011," Reports 49440, Congressional Budget Office.
    12. Congressional Budget Office, 2014. "The Distribution of Household Income and Federal Taxes, 2011," Reports 49440, Congressional Budget Office.
    13. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, December.
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    Cited by:

    1. David Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Elias Ilin & Victor Ye, 2020. "Marginal Net Taxation of Americans’ Labor Supply," NBER Working Papers 27164, National Bureau of Economic Research, Inc.
    2. David Altig & Alan Auerbach & Patrick Higgins & Darryl Koehler & Laurence Kotlikoff & Ellyn Terry & Victor Ye, 2020. "Did the 2017 Tax Reform Discriminate against Blue-State Voters?," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(4), pages 1087-1108, December.
    3. Teresa Ghilarducci & Michael Papadopoulos & Anthony Webb, 2020. "The Illusory Benefits of Working Longer on Financial Preparedness for Retirement," SCEPA working paper series. 2020-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    4. David E. Altig & Elias Ilin & Alexander Ruder & Ellyn Terry, 2020. "Benefits Cliffs and the Financial Incentives for Career Advancement: A Case Study of the Health Care Services Career Pathway," FRB Atlanta Community and Economic Development Discussion Paper 2020-1, Federal Reserve Bank of Atlanta.

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    More about this item

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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