Why the Social Security Earnings Penalty Should Be Repealed

Policy Backgrounders | Social Security

No. 152
Monday, February 28, 2000
by Bruce Bartlett

Tax Rates Punish the Elderly

Figure II - Marginal Tax Rates for Elderly Workers

The withholding of benefits acts like an additional tax on earnings.

  • For retirees between the ages of 65 and 69 it is a 33 percent tax rate.
  • For those between the ages of 62 and 64 it is a 50 percent tax rate.9

These implicit tax rates come on top of explicit taxes such as federal and state income taxes, including taxes on Social Security benefits for those whose incomes are high enough. Of course, older workers continue to pay Social Security taxes as well. For those in the 15 percent federal income tax bracket, even before state taxes this can raise the marginal tax rate as high as 63 percent for those ages 65-69 and 80 percent for those ages 62-64, as Figure II shows. The marginal tax rate is higher still for those in the 28 percent bracket, who may also be taxed on part of their Social Security benefits. One study found that the marginal tax bite, both explicit and implicit, can reach more than 100 percent in some cases.10 Another study put the top rate at 96 percent just at the federal level.11 And the incidence of high de facto marginal tax rates is not limited to just a few of the elderly. One study found that 30 percent of the single elderly and 12 percent of married elderly faced marginal tax rates exceeding 60 percent.12

Figure III - Percent of Men Over Age 65 in the Labor Market%2C 1948-1999

These high effective tax rates have a major impact on the employment status of older workers. [See Figure III.]

  • In 1999 only 16.9 percent of men over age 65 were in the labor force, either by working or seeking work.13
  • Fifty years ago, 47 percent of such men were still in the labor force.
  • At the turn of the century the figure was better than 60 percent.14

This sharp decline is all the more remarkable given the significant rise in life expectancy over this period.15

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