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Working Papers

January 2017, No. 17-02R

The Effects of Collecting Income Taxes on Social Security Benefits (Revised September 2017)

John Bailey Jones and Yue Li

Since 1983, Social Security benefits have been subject to income taxation, a provision that can significantly increase the marginal income tax rate for older individuals. To assess the impact of this tax, we construct and calibrate a detailed life-cycle model of labor supply, saving, and Social Security claiming. We find that in a long-run stationary environment, replacing the taxation of Social Security benefits with a revenue-equivalent change in the payroll tax would increase labor supply, consumption and welfare. From an ex-ante perspective an equally more desirable reform would be to make the portion of benefits subject to income taxes completely independent of other income.


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