Does It Pay Both Spouses to Work?

Policy Reports | Taxes

No. 260
Wednesday, May 14, 2003
by Jagadeesh Gokhale and Laurence J. Kotlikoff

The Impact of Social Security on Lifetime Marginal Net Tax Rates

Table II - Lifetime Marginal Net Tax Rates for Spouses%3A No Social Security System

"If the couple earns $60,000, almost 80 percent of the wife's penalty for working is due to direct taxes."

What would marginal net tax rates look like absent the Social Security system? To answer that question, we remove Social Security benefits as well as payroll taxes that support those benefits and the Social Security benefits tax in our model. Some of the results are depicted in Table II.

A quick comparison of Tables I and II suggests that Social Security makes a big difference. Many marginal net tax rates that approach one-half of lifetime income in Table I approach one-third of income in Table II. [See Figure VII.] Table III, a more precise illustration, shows how much Social Security adds to the marginal net tax rates of working spouses.

"Only couples below the poverty level are net gainers from Social Security."

The first thing to note about Table III is that all the entries except one are positive. The first row depicts a working wife with a nonworking husband. Hence, when she is earning $10,000, the family income is $10,000. Only at this poverty-level income does the couple actually gain from participation in Social Security. For every other income combination, the entries are positive (Social Security adds to marginal net tax rates) and usually substantially so. Consider Figure VIII, for example:

Figure VII - Lifetime Marginal Net Tax Rates for a Married Woman Whose Husband Earns %2460%2C000 a Year With and Without Social Security
  • If both spouses earn $10,000, 27 percentage points of the wife's marginal tax rate is due to Social Security alone.
  • This means she loses more than one out of every four dollars she earns because of the existence of Social Security.
  • At a wage of $20,000 a year, she loses more than one out of every seven dollars.

The second thing to notice is that for moderate-income families the penalty for participating in Social Security is quite high - one of every six or seven dollars the second-earner spouse receives. Thus virtually all of the Social Security payroll tax is a loss for the working spouse.

The third thing to notice about Table III is that the smallest entries are along the top row. This reflects the fact that the system highly favors one-earner couples:

  • Consider a husband who moves from no work (row one) to a $10,000 job (row two).
  • If the wife earns $20,000, the penalty for participating in Social Security jumps from 0.6 percent to 15 percent.
  • At $30,000, her husband's work effort increases her marginal tax rate from 1.5 percent to 12.6 percent; at $40,000, it goes up from 1.4 percent to 10.1 percent.
Table III - Addition to Spouse's Lifetime Marginal Net Tax Rate Due to Social Security

Figure VIII - Percentage Point Addition to Marginal Net Tax Rates Caused by Social Security for a Woman Whose Husband Earns %2410%2C000 a Year

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