Does it Pay to Work More?

Studies | Taxes

No. 310
Tuesday, April 15, 2008
by Laurence J. Kotlikoff and David S. Rapson


Notes

  1. This study is based on Laurence J. Kotlikoff and David Rapson, “Does it Pay, at the Margin, to Work and Save? – Measuring Effective Marginal Taxes on Americans’ Labor Supply and Saving,” National Bureau of Economic Research, Working Paper No. 12533, December 2006.
  2. In determining Social Security benefits the program takes full account of the earnings test, early retirement reduction factors, the delayed retirement credit, the recomputation of benefits, the family benefit maximum, the phase-in to the system’s ultimate age-67 normal retirement age, as well as offset and windfall elimination provisions.  ESPlanner’s survivor tax and benefit calculations for surviving wives (husbands) are made separately for each possible date of death of the husband (wife). That is, ESPlanner considers separately each date the husband (wife) might die and calculates the taxes and benefits a surviving wife (husband) and her (his) children would receive each year thereafter.  Moreover, in calculating survivor-state specific retirement, ESPlanner takes account of all the benefit adjustment factors.

  3. Individual workers and couples accrue higher Social Security benefit levels from increases in hours worked and may pay higher taxes in retirement as a result.  Any increase in the income they expect to receive in retirement affects their preretirement savings and consumption patterns, due to consumption smoothing.  ESPlanner accounts for the effects of their net Social Security benefits and other savings on lifetime consumption.  The level of benefits they receive and taxes they pay will also affect their propensity to work in retirement.  However, none of the individuals or couples in the simulations are receiving Social Security benefits.  In this study, the focus is on additional taxes paid and benefits lost per each additional dollar of labor income.  For a detailed discussion of the effects of Social Security on lifetime saving and consumption patterns, see Laurence J. Kotlikoff, Ben Marx and Pietro Rizza, “How Much Do Americans Depend on Social Security?” National Center for Policy Analysis, Policy Report No. 301, August 2007.

  4. “Countable” income is any income received by a potential program enrollee that is used to determine eligibility for benefits.  It can include wage income, child support, unemployment benefits, and lump sum payments.  Countable income requirements can vary by program.

  5. Jocelyn Bauduy and Christine Somogyi, “Food Stamps: Financial Eligibility Requirements,” MassResources.org.  Available at http://www.massresources.org/pages.cfm?contentID=12&pageID=3 &Subpages=yes&dynamicID=418.  All other house­holds not mentioned in the above text must meet an asset limit of $2,000.  Households with a disabled person or a person age 60 or older must meet an asset limit of $3,000.

  6. “State Assistance Programs for SSI Recipients, January 2005: Massachusetts,” Social Security Administration, September 2005, Table 1.  Available at http://www.ssa.gov/policy/docs/progdesc/ssi_st_asst/2005/ma.html

  7. Jocelyn Bauduy and Christine Somogyi, “Supplemental Security Income: Financial Eligibility Requirements,” MassResources.org, February 16, 2007.  Available at http://www.massresources.org/pages.cfm?contentID=18&pageID=4%20&subpages=yes&SecondLeveldynamicID=359&DynamicID=357.

  8. Jocelyn Bauduy and Christine Somogyi, “Emergency Aid to Elders, Disabled and Children (EAEDC): An Overview,” MassResources.org, January 10, 2007.  Available at http://www.massresources.org/pages.cfm?contentID=16&pageID=4&Subpages=yes.

  9. Medical benefits are provided by MassHealth, the state health insurance program.

  10. Caregivers in disabled households are eligible for EAEDC but not for TAFDC.

  11. “Retirement: Saver’s Credit,” University of Washington, Human Resources, undated.  Available at http://www.cac.washington.edu/admin/hr/benefits/retirement/vip/saver-credit.html.


Read Article as PDF