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Adjusting the Payroll Tax to Promote Longer Careers

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Abstract

This paper analyzes a prospective Social Security reform that a number of authors have suggested, namely a payroll tax cut targeted on households near retirement. Our approach uses simulations of a life-cycle model, which we estimate from panel data. The simulations study effects on the labor force participation of older households. This paper specifically attempts to improve estimates of the model by incorporating newly available data, using both retirement and wealth accumulation data, and employing a formulation that avoids local optima to isolate only global maxima. Despite the changes, our results are generally consistent with earlier work, though they point to slightly more limited policy benefits.

Key Findings

  • This paper re-estimates the life-cycle model of Laitner and Silverman (2012) using up-to-date data and improvements in methodology to analyze a prospective Social Security reform that a number of authors have suggested, namely a payroll-tax cut targeted on households near retirement.
  • Our model is limited to couples and the analysis studies male retirements, taking female labor force participation as given; thus, our simulations concentrate on male retirement.
  • If we make revenue-neutral changes by lowering the payroll tax at ages near retirement and raising it earlier, we can encourage longer careers — enhancing efficiency. Our improved parameter estimates can enhance confidence in the overall results.
  • The increases in labor force participation that we find are slightly smaller than LS (2012), but we suggest explanations for the difference.
  • Our results are generally consistent with earlier work, though they point to slightly more limited policy benefits.

Citation

Laitner, John, and Dan Silverman. 2017. “Adjusting the Payroll Tax to Promote Longer Careers.” Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2017-363. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp363.pdf

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Project

Paper ID

WP 2017-363

Publication Type

Working Paper

Publication Year

2017