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Removing the Disincentives in Social Security for Long Careers

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  • Gopi Shah Goda
  • John B. Shoven
  • Sita Nataraj Slavov

Abstract

Implicit taxes in Social Security, which measure Social Security contributions net of benefits accrued as a percentage of earnings, tend to increase over the life cycle. In this paper, we examine the effects of three potential policy changes on implicit Social Security tax rates: extending the number of years used in the Social Security formula from 35 to 40; allowing individuals who have worked more than 40 years to be exempt from payroll taxes; and distinguishing between lifetime low-income earners and high-income earners who work short careers. These three changes can be achieved in a benefit- and revenue-neutral manner, and create a pattern of implicit tax rates that are much less distortionary over the life cycle, eliminating the high implicit tax rates faced by many elderly workers. The effects of these policies on progressivity and women are also examined.

Suggested Citation

  • Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2007. "Removing the Disincentives in Social Security for Long Careers," NBER Working Papers 13110, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13110
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    1. Robert Fenge & Silke Uebelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo.
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    Cited by:

    1. John B. Shoven, 2010. "New Age Thinking: Alternative Ways of Measuring Age, Their Relationship to Labor Force Participation, Government Policies, and GDP," NBER Chapters, in: Research Findings in the Economics of Aging, pages 17-31, National Bureau of Economic Research, Inc.
    2. John Bailey Jones & Yue Li, 2023. "Social Security Reform with Heterogeneous Mortality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 320-344, April.
    3. 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.
    4. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2011. "Implicit Taxes on Work from Social Security and Medicare," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 69-88.
    5. Guy Lacroix & Pierre-Carl Michaud, 2024. "Tax Incentives and Older Workers: Evidence from Canada," CIRANO Working Papers 2024s-06, CIRANO.
    6. Mary J. Lopez & Sita Slavov, 2020. "Do immigrants delay retirement and social security claiming?," Applied Economics, Taylor & Francis Journals, vol. 52(10), pages 1105-1123, February.
    7. Gopi Shah Goda & John Shoven & Sita Slavov, "undated". "A Tax On Work For The Elderly: Medicare As A Secondary Payer," Discussion Papers 08-60, Stanford Institute for Economic Policy Research.
    8. Chalmers, John & Johnson, Woodrow T. & Reuter, Jonathan, 2014. "The effect of pension design on employer costs and employee retirement choices: Evidence from Oregon," Journal of Public Economics, Elsevier, vol. 116(C), pages 17-34.
    9. 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.
    10. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 457-566, Elsevier.
    11. Kenneth J. Matheny, 2009. "Trends in the aggregate labor force," Review, Federal Reserve Bank of St. Louis, vol. 91(Jul), pages 297-310.
    12. Nyce, Steven & Schieber, Sylvester J. & Shoven, John B. & Slavov, Sita Nataraj & Wise, David A., 2013. "Does retiree health insurance encourage early retirement?," Journal of Public Economics, Elsevier, vol. 104(C), pages 40-51.
    13. 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.
    14. David Wise, 2010. "Facilitating longer working lives: International evidence on why and how," Demography, Springer;Population Association of America (PAA), vol. 47(1), pages 131-149, March.
    15. Gopi Shah Goda & John Shoven, 2009. "New Age Thinking: Alternative Ways of Measuring Age, Their Relationship to Labor Force Participation, Government Policies and GDP," Discussion Papers 08-056, Stanford Institute for Economic Policy Research.
    16. John Laitner & Dan Silverman, 2017. "Adjusting the Payroll Tax to Promote Longer Careers," Working Papers wp363, University of Michigan, Michigan Retirement Research Center.
    17. John B. Shoven, 2007. "New Age Thinking: Alternative Ways of Measuring Age, Their Relationship to Labor Force Participation, Goverment Policies and GDP," NBER Working Papers 13476, National Bureau of Economic Research, Inc.
    18. Jeffrey B. Liebman & Erzo F. P. Luttmer, 2012. "The Perception of Social Security Incentives for Labor Supply and Retirement: The Median Voter Knows More Than You'd Think," Tax Policy and the Economy, University of Chicago Press, vol. 26(1), pages 1-42.
    19. John Bailey Jones & Yue Li, 2023. "Social Security Reform with Heterogeneous Mortality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 48, pages 320-344, April.
    20. Richard Woodbury, 2010. "Population aging and state pensions in New England," New England Public Policy Center Research Report 10-1, Federal Reserve Bank of Boston.
    21. 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.
    22. John Laitner, 2018. "Addressing Social Security’s Solvency While Promoting High Labor Force Participation," Working Papers wp386, University of Michigan, Michigan Retirement Research Center.

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    More about this item

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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