Social Security Tax Rate Research Articles

Average marginal tax rates in the U.S., 1913–2019

Measuring marginal tax rates at the economy-wide level, while useful for empirical work in economics and beyond, is a non-trivial exercise. This paper revises and updates through 2019 the average marginal income and Social Security tax rates originally conceived by Barro and Sahasakul (1983, 1986) and Seater (1982, 1985) and subsequently updated by Stephenson (1998). The update extends previous estimates of the marginal tax rate series over two decades—thus providing more than a century of data going back to 1913. This update also revises the estimates reported in previous studies to provide historically consistent series following more recent comprehensive revisions of the National Income and Product Accounts. The newly updated series reflect tax legislation over the last two decades. Generally, tax cuts in the early 2000s along with the Great Recession led to a decrease in overall average marginal tax rates from levels achieved in the late 1990s. The Trump tax overhaul in 2017 lowered average marginal tax rates by about one percentage point. • Data on average marginal tax rates for the U.S. individual income tax, 1913–2019. • Data on average marginal tax rates for the Social Security tax, 1937–2019. • Average marginal comprehensive (income plus Social Security) tax rates.

Pay-as-You-Go Social Security and Educational Subsidy in an Overlapping Generations Model with Endogenous Fertility and Endogenous Retirement

Abstract This study analytically investigates the effects of pay-as-you-go social security and educational subsidies on the fertility rate, retirement age, and GDP per capita growth rate in an overlapping generations model, where parents invest resources toward their children’s human capital. We find that an old agent retires fully when his or her labor productivity is low and retires later when the labor productivity is high. Under the unique balanced-growth-path (BGP) equilibrium, when an old agent is still engaged in work, tax rates are neutral to the fertility rate, higher tax rates encourage him or her to retire earlier, a higher social security tax rate depresses the GDP per capita growth rate, and a higher tax rate for educational subsidies can accelerate growth. However, when an old agent fully retires, higher tax rates increase the fertility rate, a higher social security tax rate lowers the GDP per capita growth rate, and a higher tax rate for educational subsidies boosts growth. Additionally, if an old agent’s labor productivity increases, the fertility rate also increases. We also conduct numerical simulations and analyze how an old agent’s labor productivity affects the retirement age, fertility rate, and GDP per capita growth rate under the BGP equilibrium.

Transitioning to a higher retirement age with exponential and quasi-hyperbolic discounters in mixed economies

Abstract This paper analyses the macroeconomic and welfare effects of a higher retirement age within a dynamic overlapping generations framework, wherein exponential discounting and sophisticated quasi-hyperbolic discounting agents coexist in ‘mixed economies’. The transitional dynamics of economic aggregates depend on the proportion of QHD agents, and the extent to which reducing the social security tax rate mitigates crowding-out effects on savings and enables both lower pension contributions and higher pension benefits. Welfare impacts across agent types and cohorts differ accordingly: QHD agents employ the higher retirement age as a commitment mechanism to mitigate the adverse welfare implications of present-biasedness.

Measuring the Tax Incidence of Social Security Taxes in China: Evidence from a Quasi-Natural Experiment of Tax Collection Entity Shift

Measuring the tax incidence is a classical yet on-going debate in public economics and public finance. It is also an important issue for policymaking because it provides information of the impact of labour costs on firm decisions. However, the incidence varies across different environments, but the existing literature mostly draws on the experience of developed countries, leaving the developing countries under-investigated. To fill the gap in the literature, this study focuses on China’s case. Its significance derives from the fact that China’s rapid-growing economy relies on its massive population and labour migration while its firms are sensitive to its high social security tax rates. Moreover, the identification of the underlying causality can be failed due to selection bias and simultaneity. Thus, this study exploits a quasi-natural experiment of social security tax collection entity shift to unravel the underlying causal link from social security tax burden to the employment and wages. Drawing a large sample of firm-level data of the above-scale firms in the manufacturing sector of China, this study takes an instrumental variable approach and finds out that the social security taxes significantly suppresses wages by 3.08 percent. Whereas lowered wages increase the employment in turn by 5.26 percent, also suggesting that the tax burden is shared by both the employer and the employee. As for heterogeneities, the empirical evidence of this study shows that the cost effect of social security is more significant in China’s coastal regions where the manufacturing agglomeration is higher, in large-scale firms that have annual income more than 50 million yuan per year, and in non-state-owned firms.

The potential impact of policies to reduce Social Security funding shortfalls on consumers' expected benefits and behavior

AbstractTo ensure the long-term sustainability of the US Social Security System, several policy alternatives can theoretically be implemented. However, in practice, consumer responses can be challenging for policymakers to anticipate. We conducted a randomized survey on the nationally-representative Understanding America Study (UAS) panel where respondents were presented with a series of ‘policy scenarios’ in which the government enacts alternative reforms aimed to reduce the expected shortfall in the trust fund that pays Social Security retirement benefits. These scenarios included an increase in the Social Security payroll tax, an increase in the wage ceiling, and a reduction of benefits. We find that changes in respondents’ subjective expectations about their benefits and how this will affect their behaviors are directionally consistent with what would be expected when individuals are attentive to the available information and form rational expectations (e.g., monthly benefit expectations increase upon the announcement of an increase in the Social Security tax rate or in the wage ceiling, and they decrease less-than-proportionally with hypothetical benefit cuts). However, surprisingly, these changes are not sensitive to the magnitudes of policy change (e.g., the increase in expected benefits is about the same regardless of the size of Social Security payroll tax increases). Individuals with higher levels of education, cognitive ability, and financial literacy are more likely to adjust their expectations as predicted by theory.

Myopia, education, and social security

A potential role of social security is to protect individuals who have accumulated little or no assets for retirement. Yet, this type of social safety net could reduce human capital formation by making the life-cycle financial rewards from education less attractive. For example, social security tax rates are correlated negatively with tertiary educational attainment across OECD countries. We construct a continuous-time overlapping-generations model with endogenous school duration that can account for this correlation, and we use the model to compute the social security tax rate that maximizes steady-state social welfare in general equilibrium. Social security in the model provides protection for retirees who arrive at retirement with no assets, and it can also redistribute wealth toward those with low earnings, but the program distorts the level of human and physical capital accumulation. In the presence of these characteristics, the social security tax rate that maximizes steady-state welfare is approximately 10%, which is about half of the average rate of 21% across the OECD. This result is robust to whether the social security program is redistributive or earnings based.

Myopia, Education, and Optimal Social Security

A potential role of social security is to protect individuals who have accumulated little or no assets for retirement. Yet, this type of social safety net could reduce human capital formation by making the life-cycle financial rewards from education less attractive. For example, social security tax rates are correlated negatively with tertiary educational attainment across OECD countries. We construct a continuous-time overlapping-generations model with endogenous school duration that can account for this correlation, and we use the model to compute the social security tax rate that maximizes steady-state social welfare in general equilibrium. Social security in the model provides protection for retirees who arrive at retirement with no assets, and it can also redistribute wealth toward those with low earnings, but the program distorts the level of human and physical capital accumulation. In the presence of these characteristics, the social security tax rate that maximizes steady-state welfare is approximately 10%, which is about half of the average rate of 21% across the OECD. This result is robust to whether the social security program is redistributive or earnings-based.

Fertility and labor supply of the old with pay-as-you-go pension and child allowances

Abstract We investigate the effects of pay-as-you-go pension and child allowances on fertility, labor supply of the old, and welfare. For this purpose, we analyze a small open overlapping-generations model in which fertility and an old agent’s labor supply (retirement time) are endogenized with pay-as-you-go pension and child allowances. We find that how the pay-as-you-go pension tax rate affects the fertility rate depends on whether an old agent retires. When an old agent fully retires, then the size of the interest rate and fertility rate determine the effect of the pay-as-you-go pension tax rate on the fertility rate. When an old agent works, the pay-as-you-go pension tax rate certainly reduces the fertility rate. In addition, how child allowances affect the fertility rate depends on whether an old agent works. If an old agent retires fully, then an increase in the child allowance tax rate increases the fertility rate. When an old agent works, this is not necessarily true, which suggests that an old agent’s labor status should be taken into account when we evaluate the effects of the social security system on economic variables. In addition, we examine the effect of the social security tax rates on welfare and provide numerical examples.

Determinants of aggregate income-tax-evasion behaviour: the case of US

The determinants of aggregate income-tax-evasion behaviour as reflected in the size of the underground economy in the US are analysed. These factors include the federal personal income tax rate, the social security tax rate, the federal corporation income tax rate, the public's dissatisfaction with the government, IRS audit rates and IRS penalty assessments on detected unreported income. The results show that the size of the underground economy is an increasing function of federal personal income tax rate, the social security tax rate and the public's dissatisfaction with the government. However, the size is a decreasing function of IRS penalty payments on unpaid taxes. JEL Codes: H26, E26 Keywords: Research, Underground economy, tax evasion, US economy

“Reforming” Social Security

Put aside that the government has for years collected a dedicated tax for social security and then spent some of that revenue on ordinary government expenses. And don’t mention that this “borrowed” money is supposed to be returned to the social security trust fund but never has been. With these predicates, one can say that social security currently is in financial difficulty. There are at least 3 proposed solutions. Each one disproportionately impacts a different group. One proposal is to means test social security benefits. Simply, notwithstanding that everyone pays into the system with the expectation that they will be entitled to receive benefits at a given age, means testing would effectively tell richer folks that they cannot obtain their promised money. In effect, the system would become a wealth transfer program. The winners are those who continue to receive benefits. The losers are those that have paid (and will continue to pay) but will receive no direct return on their investments. A second proposal is to increase the age eligibility for social security. This decreases the cost of social security because, obviously, the fewer years that each person collects these benefits, the less money the government needs to return to taxpayers. Everyone loses a bit in the sense that all receive less—in exchange for a stronger system, mind you. The problem is that the age cutoff disproportionately impacts those groups with lower life expectancies. African Americans, men, and the combination are the most impacted. That is, women live longer than men. So, more men than women will likely die before receiving any benefits at all—particularly as the age eligibility increases. The same is true for African Americans relative to whites. And the most dramatic difference is seen between African American men and white women. Thus, effectively, there will be some wealth transfer from the former to the latter, all else being equal. A third suggestion is to increase the amount of income that is taxed for social security. Remember that social security taxes are regressive. That is, everyone pays roughly 6% towards social security on up to approximately the first $100 000 of income. So, if you make less than that amount, then this tax is plenary. But the more anyone makes above this sum, the less effective the social security tax rate is, as it is no longer collected above the cutoff. Some argue that this: (1) is a function of the fact that social security is asserted to be a retirement plan, and (2) the payments “in” relate to the capped payments “out.” This would be largely—albeit not completely—true had the government not systematically raided the social security trust fund to build roads, pay bureaucrats, and, inter alia, send rockets into space. But the real way in which the social security system has been operated makes clear that it is not an individualized retirement program like, say, a 401(k) plan. Moreover, the notion that richer people pay more for the same services—such as roads and national defense—is neither new nor generally controversial. Under the proposal to increase or remove the cap, there are partial winners and losers. Those who earn above the cutoff will partially lose by paying more for the same benefits, and those earning below it will pay the same—and all will have a stronger system. Whichever solution is pursued, one reform not yet mentioned is both critical and just. Social security taxes should be, as Al Gore suggested a long time ago, placed in a truly secure fund. No longer should the government be able to “borrow” from the trust fund—no less with no reasonable likelihood that the money will ever be repaid. Government likes to spend money. If the money is not dedicated for retirement, then the government should: (1) admit that the social security tax is just another income tax, (2) the social security tax should be combined with the income tax that it has propped up, and (3) Americans should be told the true total amount of federal income taxes that they pay. I certainly am not suggesting this outcome, but I deplore the duplicitous means by which Americans are currently taxed under the pretext of a universal retirement plan. Author Affiliations: University of Arkansas at Little Rock, William H. Bowen School of Law. Correspondence: Robert Steinbuch, JD, MA, Professor of Law, University of Arkansas at Little Rock, William H. Bowen School of Law, 1201 McMath Ave, Little Rock, AR 72202 (resteinbuch@ualr.edu).

Limited computational ability and social security

We revisit the role of social security in countering inadequate saving for retirement. We compute the optimal social security tax rate for households who lack the computational ability to solve dynamic optimization problems. Instead, they follow the simple rule of thumb of consuming and saving a fixed fraction of disposable income. This departs from the tradition of computing the optimal tax rate when households suffer from some type of behavioral bias yet possess the ability to solve dynamic optimization problems. Our general equilibrium model is calibrated to the moments of the distribution of saving rates in the US, and our results are generally supportive of a social security program as large as the one in the US.

Myopia and pensions in general equilibrium

The US social security tax rate has doubled in the last half century. Does the degree of myopic behavior that we observe in the US justify the size of the social security program? To study this question we build a computable general equilibrium model that is composed of life-cycle permanent-income consumers who save optimally and “hand-to-mouth” consumers who just consume their disposable income. Our model is a continuous-time, general equilibrium extension of the model by Cremer et al. (Int Tax Public Financ 15(5):547–562, 2008), though we abstract from the redistributive function of social security to focus on myopia. Retirement is a choice variable in our model and the social security program is designed to mimic the US program in which the annuity value of benefits increases with the retirement age. Also, we allow for delayed claiming beyond the date of retirement. The model matches a variety of important data targets relating to saving and retirement. We find that small reductions in the social security tax rate provide significant welfare gains to both groups of consumers.

The dynamics of inequality and social security in general equilibrium

This paper analyzes the dynamic politico-economic equilibrium of a model where repeated voting on social security and the evolution of household characteristics in general equilibrium are mutually affected over time. In particular, we incorporate within-cohort heterogeneity in a two-period Overlapping-Generation model to capture the intra-generational redistributive effect of social security transfers. Political decision-making is represented by a probabilistic voting à la Lindbeck and Weibull (1987). We analytically characterize the Markov perfect equilibrium, in which social security tax rates are shown to be increasing in wealth inequality. A dynamic interaction between inequality and social security leads to larger social security programs. In a model calibrated to the U.S. economy, the dynamic interaction is shown to be quantitatively important: It accounts for more than half of the social security growth in the dynamics. We also perform some normative analysis, showing that the politico-economic equilibrium outcomes can be fundamentally different from the Ramsey allocation.

Demographic Change and the Current Account: Theory and Empirical Evidence

This paper examines the effects of population growth on national saving, investment, and the current account. An open-economy overlapping generations model with a pay-as-you-go social security system is used to derive the following theoretical predictions: (i) the investment rate is increasing in the population growth rate; (ii) the saving rate is ambiguously related to the population growth rate but negatively related to the social security tax rate; and, therefore, (iii) the current account is also ambiguously related to population growth and negatively related to the tax rate. The empirical evidence, using data from the 1970 to 2003 period for various subsets of 154 economies, supports the following: (i) both the investment and saving rates are negatively related to population growth and government size, but positively related to growth; and (ii) these effects on saving are stronger, and so the net foreign balance is also negatively related to both population growth and government size.

The Dynamics of Inequality and Social Security in General Equilibrium

This paper analyzes the dynamic politico-economic equilibrium of a model where repeated voting on social security and the evolution of household characteristics in general equilibrium are mutually affected over time. In particular, we incorporate within-cohort heterogeneity in a two-period Overlapping-Generation model to capture the intra-generational redistributive effect of social security transfers. Political decision-making is represented by a probabilistic voting a la Lindbeck and Weibull (1987). We analytically characterize the Markov perfect equilibrium, in which social security tax rates are shown to be increasing in wealth inequality. The dynamic interaction between inequality and social security leads to growing social security programs. We also perform some normative analysis, showing that the politico-economic equilibrium outcomes are fundamentally different from the Ramsey allocation.

Is Social Security Behind the Collapse of Personal Saving?

This paper considers the quantitative role of growth in the size of the social security program in contributing to the collapse of personal saving in the U.S. over the last few decades. Using a calibrated, general equilibrium life-cycle model this paper shows that social security may not be to blame. Specifically, the model predicts that a 50-percent increase in the social security tax rate (as in the U.S. over the last half century) produces a modest decline in the personal saving rate from 10 percent down to 9.6 percent. This result runs counter to some popular opinion.

The future of social security

We analyze the effect of the projected demographic transition on the political support for social security, and equilibrium outcomes. Embedding a probabilistic-voting setup of electoral competition in the standard OLG model with capital accumulation, we find that intergenerational transfers arise in the absence of altruism, commitment, or trigger strategies. Closed-form solutions predict population ageing to lead to higher social security tax rates, a rising share of pensions in GDP, but eventually lower social security benefits per retiree. The response of equilibrium tax rates to demographic shocks reduces old-age consumption risk. Calibrated to match features of the U.S. economy, the model suggests that, in response to the projected demographic transition, social security tax rates will gradually increase to 16%. Other policies that distort labor supply will become less important; labor supply therefore will rise, in contrast with frequently voiced fears.

Why are more redistributive social security systems smaller? A median voter approach

One of the stylized facts of unfunded social security programs is that programs are larger in size, measured relative to the GDP, the tighter the link between pension claims and past earnings. We provide a political economy explanation of this stylized fact in a median voter model, where people vote on the social security tax rate. We compare pension systems with flat-rate and earnings-related benefit formulas. Only flat-rate benefits redistribute within a generation from high to low income groups. If labor supply is endogenous, they also imply larger efficiency costs than earnings-related schemes. Using data on eight European countries, we find that the median voter is typically middle-aged with high income. For these voters, earnings-related systems are more attractive both because of less intragenerational redistribution and lower distortions in labor supply. The median voter model is also able to account for a considerable degree of cross-country variation in contribution rates.

Tax Reforms as Capital Market Development Factor

The article presents the preconditions of Armenian capital market development. A few hypotheses are proposed concerning correlation between direct taxes (in particular, profit tax and income tax) and financial sector development mediated with shadow economy. On the basis of studied theories and our empiric research (regression analysis of key indicators), our hypotheses were proven. So for the further development of Armenian capital market we consider it necessary to depart from profit tax, concurrently reducing income tax and social security tax rates.

Smoking: Taxing Health and Social Security

While the health risks associated with smoking are well known, the impact on income distributions is not. This paper extends the literature by examining the distributional effects of a behavioral choice, in this case smoking, on net marginal Social Security tax rates (NMSSTR). The results show that smokers, as a result of shorter life expectancies, incur a higher NMSSTR than nonsmokers. In addition, as low-earnings workers have a higher smoking prevalence than high-earnings workers, smoking works to widen the income distribution. This higher tax rate could have implications for both labor supply behavior and Social Security system funding.