IDEAS home Printed from https://ideas.repec.org/p/sip/dpaper/06-021.html
   My bibliography  Save this paper

Implicit Social Security Tax Rates over the Life Cycle

Author

Listed:
  • Gopi Shah Goda

    () (Stanford University)

Abstract

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.

Suggested Citation

  • Gopi Shah Goda, 2007. "Implicit Social Security Tax Rates over the Life Cycle," Discussion Papers 06-021, Stanford Institute for Economic Policy Research.
  • Handle: RePEc:sip:dpaper:06-021
    as

    Download full text from publisher

    File URL: http://www-siepr.stanford.edu/repec/sip/06-021.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, vol. 105(2), pages 338-369, August.
    3. 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.
    4. Jean-Marie Lozachmeur, 2006. "Optimal Age-Specific Income Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 697-711, October.
    5. 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 211-234, June.
    6. Robert Fenge & Silke Übelmesser & Martin Werding, 2002. "Second-best Properties of Implicit Social Security Taxes: Theory and Empirical Evidence," CESifo Working Paper Series 743, CESifo Group Munich.
    7. 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.
    8. 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.
    9. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
    10. Cushing, Matthew J., 2005. "Net Marginal Social Security Tax Rates Over the Life Cycle," National Tax Journal, National Tax Association, vol. 58(2), pages 227-245, June.
    11. Sören Blomquist & Luca Micheletto, 2008. "Age-related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2007. "Social Security and the Timing of Divorce," NBER Working Papers 13382, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    social security; disincentive; benefits; tax rate;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/cestaus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.