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How Much Does Work Pay at Older Ages?

  • Damir Cosic
  • Richard W. JohnsonEmail author
Chapter

Abstract

Various features of the US tax code, employee benefits, and the retirement system reduce the returns to work at older ages, discouraging some older adults from working. Using dynamic microsimulation techniques with a nationally representative sample of adults ages 60–70, this chapter estimates the implicit tax on work, indicating how much employees’ financial reward for working falls below compensation paid by employers. Results show that the median implicit tax on work rises from 15.0% of total compensation at age 60 to 39.0% at age 65, 41.7% at age 67, and 46.4% at age 70. Some older workers face even higher implicit tax rates. At age 70, one quarter of workers face an implicit tax rate of at least 67.3%, and a tenth face an implicit tax rate of at least 112.9%. Medicare secondary payer rules, minimum withdrawal requirements for certain retirement accounts, and rules governing the accumulation of future Social Security benefits raise the implicit tax on work at older ages. Various policy changes could reduce work disincentives and promote employment by older adults.

Keywords

Financial incentive to work at older ages Dynamic microsimulation model Defined benefit pension plans Tax codes Social security Individual retirement accounts Medicare benefits Employee fringe benefits Implicit tax on work 

Notes

Acknowledgements

The research described in this chapter was funded by the Alfred P. Sloan Foundation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Funders do not determine research findings or the insights and recommendations of Urban experts. Further information about the Urban Institute’s funding principles is available at http://www.urban.org/aboutus/our-funding/funding-principles.

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Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.Urban InstituteWashingtonUSA

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