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Implicit Taxes on Work from Social Security and Medicare

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  • Gopi Shah Goda
  • John B. Shoven
  • Sita Nataraj Slavov
Abstract
Implicit taxes are present in many government programs and can create substantial work disincentives. The implicit tax created by Social Security is the payroll tax used to fund the retirement portion of Social Security minus the present value of the incremental retirement benefits associated with the earnings. While the payroll tax is always 10.6%, the implicit tax varies over a worker's career because additional earnings translate nonlinearly into additional retirement benefits. We show that workers at the start of their careers experience lower implicit tax rates, as the increase in benefits from additional work is relatively large. However, workers who are closer to retirement earn little or no additional benefit from additional work. The main implicit tax in Medicare lies in the Medicare as Secondary Payer (MSP) policy, which requires Medicare to be a secondary payer for Medicare-eligible workers whose employers offer a health plan and have 20 or more employees. Thus, affected workers effectively forgo the Medicare benefits that they would have received if they had not been working. We investigate a combination of policies that can reduce average implicit tax rates on older workers by as much as 45%.

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  • Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2011. "Implicit Taxes on Work from Social Security and Medicare," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 69-88.
    • Handle: RePEc:ucp:tpolec:doi:10.1086/658381
    DOI: 10.1086/658381
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    Cited by:

    1. John Sabelhaus & Alice Henriques Volz, 2020. "Social Security Wealth, Inequality, and Life-Cycle Saving," NBER Chapters, in: Measuring Distribution and Mobility of Income and Wealth, pages 249-285, National Bureau of Economic Research, Inc.
    2. John Sabelhaus & Alice Henriques Volz, 2020. "Social Security Wealth, Inequality, and Lifecycle Saving," NBER Working Papers 27110, National Bureau of Economic Research, Inc.
    3. Bishnu, Monisankar & Guo, Nick L. & Kumru, Cagri S., 2019. "Social security with differential mortality," Journal of Macroeconomics, Elsevier, vol. 62(C).
    4. Gustafsson, Johan, 2021. "Public Pension Reform and the Equity-Efficiency Trade-off," Umeå Economic Studies 992, Umeå University, Department of Economics.
    5. Monisankar Bishnu & Nick L. Guo & Cagri S Kumru, 2017. "Social Security: Progressive Benefits but Regressive Outcome?," ANU Working Papers in Economics and Econometrics 2017-656, Australian National University, College of Business and Economics, School of Economics.
    6. John B. Shoven & Sita Nataraj Slavov, 2012. "The Decision to Delay Social Security Benefits: Theory and Evidence," NBER Working Papers 17866, National Bureau of Economic Research, Inc.
    7. Yuanyuan Deng & Hugo Benítez-Silva, 2021. "An Empirical Model of Medicare Costs: The Role of Health Insurance, Employment, and Delays in Medicare Enrollment," Econometrics, MDPI, vol. 9(2), pages 1-32, June.
    8. John Sabelhaus & Alice Henriques Volz, 2020. "Social Security Wealth, Inequality, and Life-cycle Saving: An Update," Working Papers wp416, University of Michigan, Michigan Retirement Research Center.

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