How Much Does Work Pay at Older Ages?
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.
KeywordsFinancial 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
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.
- Diamond, P., & Gruber, J. (1999). Social security and retirement in the U.S. In J. Gruber & D. A. Wise (Eds.), Social security and retirement around the world (pp. 437–474). Chicago: University of Chicago Press.Google Scholar
- Favreault, M. M., Smith, K. E., & Johnson, R. W. (2015). The dynamic simulation of income model (DYNASIM). Washington, DC: Urban Institute. Retrieved 5/7/2018 from https://www.urban.org/research/publication/dynamic-simulation-income-model-dynasim-overviewGoogle Scholar
- Goda, G. S., Shoven, J. B., & Slavov, S. N. (2011). Implicit taxes on work from social security and Medicare. In J. Brown (Ed.), Tax policy and the economy (Vol. 25, pp. 69–88). Chicago: University of Chicago Press.Google Scholar
- Gokhale, J., Kotlikoff, L. J., & Sluchynsky, A. (2002). Does it pay to work? NBER working paper no. 9096. Cambridge, MA: National Bureau of Economic Research.Google Scholar
- Johnson, R. W., Burman, L. E., & Kobes, D. (2004). Annuitized wealth at older ages: Evidence from the health and retirement study. Washington, DC: Urban Institute. Retrieved 5/7/2018 from https://www.urban.org/research/publication/annuitized-wealth-older-agesGoogle Scholar
- Kaiser Family Foundation & Health Research and Educational Trust. (2017). Employer health benefits 2017 annual survey. Retrieved 5/7/2018 from https://www.kff.org/health-costs/report/2017-employer-health-benefits-survey.Google Scholar
- Sammartino, F., Stallworth P., & Weiner, D. (2018). The effect of the TCJA individual income tax provisions across income groups and across the states. Washington, DC: Retrieved 5/7/2018 from https://www.taxpolicycenter.org/publications/effect-tcja-individual-income-tax-provisions-across-income-groups-andacross-states
- Tax Foundation. (2016). 2017 Tax brackets. Retrieved 5/7/2018 from https://taxfoundation.org/2017-tax-brackets.
- Tax Policy Center. (2018). State individual income tax rates 2000–2018. Retrieved 5/7/2018 from https://www.taxpolicycenter.org/statistics/state-individual-income-tax-rates-2000-2018.
- U.S. Bureau of Labor Statistics. (2017). Employee benefits survey: Retirement benefits. Retrieved 5/7/2018 from https://www.bls.gov/ncs/ebs/benefits/2017/ownership/civilian/table02a.htm.Google Scholar
- Urban Institute. (2015). DYNASIM: Projecting older Americans’ future Well-being. Retrieved 5/7/2018 from https://www.urban.org/research/publication/dynasim-projecting-older-americans-future-wellbeing.Google Scholar