Giving every U.S. employee a 10 percent raise when they reach age 55 would help trim the more than $15 trillion federal deficit, according to new research.
By eliminating Social Security payroll taxes starting when workers turn 55, a study by economists at the University of Michigan shows that take-home pay would jump by 10.6 percent and that employees would work 1.5 years longer on average, paying more income taxes and helping to reduce the federal deficit.
"People are living longer, healthier lives, and so far have opted to take most of that extra time as additional retirement rather than work," said John Laitner, who conducted the analysis with Dan Silverman. "We are proposing a way of responding to this situation through targeted tax-rate changes that would reward older workers for staying on the job and also benefit the economy as a whole."
Using data from the Institute for Social Research Health and Retirement Study and from the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics, the researchers looked at how tax cuts targeted at older workers would affect the likelihood of working longer and the size of the federal deficit.
"Our idea is to lower the taxes on an individual precisely at the time of life when people are making decisions about whether to work longer or retire," Silverman said.
In order for their theory to work, the researchers said workers would need to pay about 1 percent higher in payroll taxes each year until age 55 in order for the Social Security system to break even. Over a lifetime, the study found most households would pay about $15,000 more in federal income tax.
When they reach 55, the researchers said employees would see their after-tax earnings increase by 10.6 percent — inducing them to work longer and enjoy the extra income. Laitner did caution, however, that not everyone would benefit from their proposal.
"Households with a strong preference for very early retirement would pay the slightly higher payroll tax before age 55, but leave the labor force before gaining much from the elimination of the payroll tax after that," he said. "Late retirees would, by the same token, be big winners. And the point of the reform, after all, is to encourage work by rewarding it."
The analysis appears in the current issue of The Journal of Public Economics.