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Implicit Social Security Tax Rates over the Life Cycle

  • Gopi Shah Goda


    (Stanford University)

The U.S. Social Security benefit structure implicitly creates disincentives towards working long careers. Workers near retirement often gain little additional benefit from continued work because of Social Securitythe benefit formula. This paper develops a framework to examine these disincentives and applies it to a set of stylized workers, as well as to actual earnings records of primary and secondary earners. While the conventional wisdom is that net Social Security tax rates fall with age due to the discounting of future benefits for interest and mortality, this paper shows that the overwhelming pattern of implicit Social Security tax rates is increasing. The distinction comes mainly from incorporating two features of the system: only the highest 35 years of indexed earnings count towards Social Security benefits,and the benefit calculation does not distinguish between low-income earners who work long careers and high-income earners who work short careers. In addition, married couples face different incentives than single workers. Marriage reduces primary earners’ implicit tax rates, but raises the implicit tax rates faced by secondary earners. Because both older workers and secondary earners tend to have high labor supply elasticities, raising revenue from these workers has efficiency considerations.

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Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 06-021.

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Date of creation: Feb 2007
Date of revision:
Handle: RePEc:sip:dpaper:06-021
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  1. Cushing, Matthew J., 2005. "Net Marginal Social Security Tax Rates over the Life Cycle," National Tax Journal, National Tax Association, vol. 58(2), pages 227-45, June.
  2. 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.
  3. 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 Group Munich.
  4. Feldstein, Martin & Samwick, Andrew A., 1992. "Social Security Rules and Marginal Tax Rates," National Tax Journal, National Tax Association, vol. 45(1), pages 1-22, March.
  5. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  6. Barbara A Butrica & Karen Elizabeth Smith & C. Eugene Steuerle, 2006. "Working for a Good Retirement," Working Papers, Center for Retirement Research at Boston College wp2006-8, Center for Retirement Research, revised May 2006.
  7. Blomquist, Sören & Micheletto, Luca, 2003. "Age Related Optimal Income Taxation," Working Paper Series 2003:7, Uppsala University, Department of Economics.
  8. LOZACHMEUR, Jean-Marie, 2002. "Optimal age specific income taxation," CORE Discussion Papers 2002046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Michael J. Boskin & Eytan Sheshinski, 1979. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  10. Butrica, Barbara A. & Johnson, Richard W. & Smith, Karen E. & Steuerle, C. Eugene, 2006. "The Implicit Tax on Work at Older Ages," National Tax Journal, National Tax Association, vol. 59(2), pages 211-34, June.
  11. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
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