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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
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Handle: RePEc:sip:dpaper:06-021
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  1. Barbara A. Butrica & Karen E. Smith & C. Eugene Steuerle, 2006. "Working for a Good Retirement," Economics Working Paper Archive wp_463, Levy Economics Institute.
  2. Sören Blomquist & Luca Micheletto, 2008. "Age-related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, 03.
  3. LOZACHMEUR, Jean-Marie, 2002. "Optimal age specific income taxation," CORE Discussion Papers 2002046, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Michael J. Boskin & Eytan Sheshinski, 1979. "Optimal Tax Treatment of the Family: Married Couples," NBER Working Papers 0368, National Bureau of Economic Research, Inc.
  5. Andrés Erosa & Martin Gervais, 1998. "Optimal Taxation in Life-Cycle Economies," UWO Department of Economics Working Papers 9812, University of Western Ontario, Department of Economics.
  6. 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.
  7. 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.
  8. 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.
  9. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  10. Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
  11. 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.
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