Removing the Disincentives in Social Security for Long Careers
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.
This research was supported by the U.S. Social Security Administration through grant #10-P-98363-1-03 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, or any agency of the Federal Government, or the National Bureau of Economic Research.
Removing the Disincentives in Social Security for Long Careers, Gopi Shah Goda, John B. Shoven, Sita Nataraj Slavov. in Social Security Policy in a Changing Environment, Brown, Liebman, and Wise. 2009