Is Uncle Sam Encouraging Americans to Retire?
Americans may be talking about working longer, but does U.S. tax policy work against those who do?
A new research paper, “Is Uncle Sam Inducing the Elderly to Retire?
” notes that many, if not most, Baby Boomers appear at risk of suffering a major decline in their living standard in retirement, and with federal and state government finances “far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits,” Boomers must look to their own devices to rescue their retirements, namely working harder and longer.
However, the researchers caution that the incentive of Boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern, they cite Medicaid and Social Security’s complex Earnings Test and clawback of disability benefits.
Why are tomorrow’s retirees likely to face greater challenges than today’s? Well, there is the legislated increase in the full retirement age, which means that many will experience lower Social Security replacement rates. Moreover, the failure to index the thresholds at which first 50% and then 85% of Social Security benefits are subject to federal income taxation means that a growing number of Boomers will experience an ever higher rate of Social Security benefit taxation – both of which mean that there will likely be significantly lower long-run Social Security replacement rates over the next 15 years.
They measured these “work disincentives” confronting those age 50 to 79 from the entire array of explicit and implicit fiscal work disincentives. Specifically, the paper runs older respondents in the Federal Reserve’s 2013 Survey of Consumer Finances through The Fiscal Analyzer – a software tool designed, in part, to calculate remaining lifetime marginal net tax rates.
Indeed, they found that working longer, say an extra five years, can raise older workers’ sustainable living standards. But the impact is far smaller than suggested in the literature in large part because of high net taxation of labor earnings.
The researchers found that many Baby Boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of the current fiscal system. Moreover, they found that the marginal net tax rate associated with a significant increase in earnings, say $20,000 per year, arising from taking a full-time or part-time job can, for many elderly, be dramatically higher than that associated with earning a relatively small, say $1,000 per year, extra amount of money, due to the various income thresholds in our fiscal system.
So, is Uncle Sam “inducing” the elderly to retire? Based on the work disincentives noted that are imposed on the elderly, the researchers conclude that the answer “seems clearly to be yes.” However, they note that the question remains: Do the elderly correctly perceive these disincentives?
Indeed, given the complexity and interactions of the nation’s fiscal system (among other factors), they conclude that it’s hard to believe that policymakers themselves are cognizant of the level and spread of the work disincentives they are imposing on the elderly.
Which brings up an interesting point (not addressed by the researchers): Can an unknown and/or underappreciated incentive provide an effective inducement in a way that influences behavior?