Working Paper: NBER ID: w13110
Authors: Gopi Shah Goda; John B. Shoven; Sita Nataraj Slavov
Abstract: 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.
Keywords: No keywords provided
JEL Codes: H5; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current social security system (H55) | high implicit tax rates (H29) |
| high implicit tax rates (H29) | discourage longer careers (J26) |
| extending AIME calculation to 40 years (C41) | reduce implicit tax rates (H29) |
| reduce implicit tax rates (H29) | provide direct incentive for individuals to extend working years (J26) |
| proposed reforms (E69) | not alter overall progressivity of the system (H19) |
| implicit tax rates closer to zero (H29) | enhance incentive to work longer (J26) |
| reforms (P41) | redistribute benefits from short-careered workers to long-careered workers (J32) |