PhotoU.S. workers now have the option of retiring at age 62, and with increases in longevity could expect to draw Social Security benefits for some 30 years. Should they be paid for extending their work lives?

Two economists at the University of Michigan (U-M) think they should and are advocating adjustments in the payroll tax rate to provide the incentive.

“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 U-M economist John Laitner, who conducted the analysis with U-M economist 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.”

Both Laitner and Silverman are affiliated with the U-M Retirement Research Center, based at the U-M Institute for Social Research (ISR). Their outside-the-box approach would, in effect, give every employee over age 55 an automatic 10 percent pay raise. Under their plan, when a worker reached age 55 they would stop paying anything toward Social Security and Medicare tax, the payroll tax.

Tax cut would raise take-home pay

By eliminating social security payroll taxes starting when workers are 55-years-old, the study shows that people’s take-home pay would jump by 10.6 percent and they would work 1.5 years longer on average, paying more income taxes and helping to reduce 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.

The reasoning is that if employees were making more money they wouldn't want to give it up. Maybe so, but what about the drain that would place on the already over-burdens retirement system?

The answer, say Silverman and Laitner, is an increase in the payroll tax rates. Workers would pay about one percent higher payroll taxes a year until age 55 in order for the Social Security system to break even, the researchers said. This would mean that over their lifetimes, households would pay about $15,000 more in Federal income tax, providing welcome reductions in the Federal deficit.

Increases the incentive

It also increases the incentive to work as long as possible after age 55, they say. The longer they work the more they get back.

Work years beyond age 54 would not affect benefits, and as in the current system, workers could claim benefits as early as age 62 although waiting until full retirement age would continue to be rewarded with higher benefit levels.

“Not everyone would benefit,” said Laitner. “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. 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 two economists say the whole point is to keep workers in the labor force as long as possible so that they are productive and paying taxes, rather than drawing benefits.

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