Labor Supply of Older Americans: Effects of Tax Rates and Tax Treatment of Pension and Social Security Income

Published: 2006
Project ID: UM06-08


Increased labor supply may be one of several responses of the elderly to insufficient retirement income. If the Federal government considers policies to encourage labor supply among the elderly, they must understand how various features of the tax code encourage or discourage the elderly to work. In addition to the tax rate, the tax treatment of Social Security and pension income has big effects on the financial payoff to working. In fact, many individuals face a jump in the marginal tax rate they face on earnings once they start collecting Social Security and pension income. To examine how sensitive retirees are to these incentives, this project will exploit variation in these features of the tax system across states during the period from 1998 to 2004. Large differences across states in both marginal tax rates and the tax treatment of pension and Social Security income make this strategy possible. We will use the Health and Retirement Study linked to geographic identifiers. This issue is a timely policy question as tax reform and Social Security are concurrently on the Administration’s agenda.