Implicit Social Security Tax Rates over the Life Cycle
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.
|Date of creation:||Feb 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (650) 725-1874
Fax: (650) 723-8611
Web page: http://siepr.stanford.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Andres Erosa & Martin Gervais, 2000.
"Optimal taxation in life-cycle economies,"
00-02, Federal Reserve Bank of Richmond.
- 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.
- Blomquist, Sören & Micheletto, Luca, 2003.
"Age Related Optimal Income Taxation,"
Working Paper Series
2003:7, Uppsala University, Department of Economics.
- LOZACHMEUR, Jean-Marie, 2002.
"Optimal age specific income taxation,"
CORE Discussion Papers
2002046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Michael J. Boskin & Eytan Sheshinski, 1979.
"Optimal Tax Treatment of the Family: Married Couples,"
NBER Working Papers
0368, National Bureau of Economic Research, Inc.
- Boskin, Michael J. & Sheshinski, Eytan, 1983. "Optimal tax treatment of the family: Married couples," Journal of Public Economics, Elsevier, vol. 20(3), pages 281-297, April.
- 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.
- Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:sip:dpaper:06-021. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Shor)
If references are entirely missing, you can add them using this form.