Wednesday, August 29, 2012

Research: Eliminating Social Security Taxes on Older Workers Would Encourage Longer Working Lives, Reduce Government Expenses

According to research published by the University of Michigan's Institute for Social Research, eliminating social security payroll taxes starting when workers are 55-years-old would lead to their take-home pay jumping by 10.6%, and they would work 1.5 years longer on average, paying more income taxes, and helping to reduce the Federal deficit. In their article "Consumption, retirement and social security: Evaluating the efficiency of reform that encourages longer careers," in the Journal of Public Economics, University of Michigan economists John Laitner and Dan Silverman explore how tax cuts targeted at older workers would affect the likelihood of working longer and the size of the federal deficit.

According to their abstract, "The estimated magnitude of the change in consumption–expenditure depends importantly on the treatment of consumption by adult children of the household. Simulations indicate that the reform could increase retirement ages one year or more, equivalent variations could average more than $4000 per household, and income tax revenues per household could increase by more than $14,000."

However, in order for the Social Security system to break even,
workers would need to pay about one percent higher payroll taxes a year until age 55. Thus, Laitner said:
Households with a strong preference for very early retirement would pay the slightly higher payroll tax before age 55, but leave the labor force before gaining much from the elimination of the payroll tax after that. Late retirees would, by the same token, be big winners. And the point of the reform, after all, is to encourage work by rewarding it.
Source: Institute for Social Research, University of Michigan Research Release (August 28, 2012)

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