Does It Pay Both Spouses to Work?
Wednesday, May 14, 2003
by Jagadeesh Gokhale and Laurence J. Kotlikoff
Table of Contents
- Executive Summary
- Calculating the Effects of Social Security on Two-Earner Couples
- Lifetime Taxes and Lifetime Transfer Benefits
- Lifetime Marginal Net Tax Rates for Working Spouses
- Components of Marginal Net Tax Rates
- The Impact of Social Security on Lifetime Marginal Net Tax Rates
- Present Value of the Loss from Forced Participation in Social Security
- About the Authors
Present Value of the Loss from Forced Participation in Social Security
Because working couples are required to participate in Social Security, they are worse off than they otherwise would be. That is, their lifetime consumption of goods and services is lower than it would be in the absence of Social Security payroll taxes and Social Security benefits.
How much worse off are young couples? Table IV illustrates the lifetime penalty in today's dollars of forced participation in Social Security. As the table shows:
- A couple in which each spouse earns $10,000 a year can expect to pay almost $60,000 in Social Security taxes over and above any benefits during their lifetimes.
- The penalty for participating in Social Security is almost six times the wife's annual wage income.
"The penalty from Social Security falls as income rises."
Note that the penalty for Social Security participation rises with income. So a couple in which each earns $80,000 will pay almost twice the lifetime penalty paid by a couple in which each earns $10,000 a year. As a fraction of income, however, the burden of Social Security falls as income rises - reflecting the fact that the burden of Social Security tends to be regressive when all lifetime effects are taken into account.
This is illustrated in Figure IX, which shows the case of a couple in which the husband earns $50,000 a year. Note that:
- When the wife earns $10,000 a year, the lifetime burden of Social Security is equal to more than three times her annual income.
- At $100,000 a year, however, the lifetime burden of Social Security is roughly equal to her annual income.