Implicit Social Security Tax Rates over the Life Cycle

The U.S. Social Security benefit structure implicitly creates disincentives towards working long careers. Workers who are near retirement often gain little additional Social Security benefit from continued work because of particular features of the Social Security 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.