What is the Effective Social Security Tax on Additional Years of Work?

John Sabelhaus, National Tax Journal 60(3), 491-506, September .


The U.S. Social Security retired worker benefit calculation is based on the average of the highest 35 years of each individual's earnings; thus, payroll taxes for people with flat or declining earnings can effectively become a pure tax near the end of their working careers. Individuals who still have zero or low–earning years being factored into their high–35 calculation face much lower (even negative) effective tax rates if they work additional years. In this paper, administrative earnings data are used to measure the distribution of effective payroll tax rates across and within age, sex, and lifetime earnings groups. The estimates are somewhat sensitive to assumptions about discounting, controlling for differential mortality, and whether to focus on all earners or just earners at the end of their primary careers. A budget–neutral change in tax and benefit formulas is shown to significantly flatten the pattern of effective tax rates.

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