Making Work Pay For the Elderly

Laurence Kotlikoff
Boston University

March 2018
10,000 Baby Boomers Are Retiring Each Day

Many/Most Poorly Prepared to Pay for Retirements

that May Last Longer than they Worked
 Older Americans Are Working

More, But, Like All Americans, they

Face a Plethora of Work Disincentives

Male and Female Labor Force Participation Rates, 2000-2015
Male Female
Age 2000 2015 2000 2015
55 79.8 80.6 65.2 70.2
56 79.7 78.0 64.9 67.6
57 77.9 77.5 61.8 67.2
58 75.6 76.5 58.4 64.3
59 71.0 72.4 55.6 62.1
60 66.2 70.3 51.5 57.6
61 65.9 67.8 46.4 54.7
62 53.0 60.5 38.7 50.1
63 44.0 55.6 33.6 44.6
64 43.2 51.3 29.9 40.4
65 35.9 44.8 23.2 35.6
66 32.7 39.6 21.6 30.0
67 30.3 35.2 19.3 26.7
68 28.1 32.6 16.6 24.4
69 23.8 29.7 16.4 21.3
70 20.2 27.3 10.9 18.7
 Older Americans, Like All
Americans, Face a
Plethora of Work Disincentives
 U.S. Work Disincentives and Incentives
Federal Income Tax Brackets
Dividend and Cap Gains Taxes
Alternative Minimum Tax
Taxation of Social Security Benefits
Medicare High-Income Taxes
Phase Out of Deductions and
Exemptions
Federal Corporate Income Tax
Federal Excise Taxes
Federal Estate and Gift Taxes
Social Security FICA Tax
Social Security Earnings Test
SS Disability Benefit Loss
SSI Benefit Loss
Social Security Spousal,
Widow(er), Divorced Spousal,
Divorced Widow(er), Child
Benefits
Recomputation of Benefits
Adjustment of SS Early Benefit
Reduction Factors
Delayed Retirement Credits
Medicare FICA Tax
Medicare Part B Premiums
Medicare Benefit Loss
Obamacare Subsidies
Food Stamps
Earned Income Tax Credit
State Income Taxes
State Corp Income Taxes
City Income Taxes
State Sales Taxes
State Estate Taxes
Loss of Medicaid Benefits
Loss of Medicaid’s Medicare
Premium Payment
TANF (Loss of Welfare Benefits)
Generation Skipping Trusts
Subsidy to Imputed Rent
Charitable Deductions
State/Local Tax Deductions
Incentive to Work Depends Not Just on the Extra Taxes
We Pay this Year from Earning More Money this Year, but
Also on the Extra Taxes we Pay in All Future years.

Incentive to Work Also Depends on the Extra Benefits We

Earn or Lose from Earning More Money this Year.
Economists Have Long Been Mis-measuring Work Disincentives

We’ve Been Measuring Current Marginal Gross Tax Rates --  C/ Y

We Need to Measure Remaining Lifetime Marginal Net Tax Rates --

 PVC/R
 Calculating Remaining Lifetime Marginal Net Tax Rates (LMTRs)

UC Berkeley Economist, Alan Auerbach and I, Together With Darryl Koehler from
My Software Company, Have Been Calculating LMTRs.
See, “U.S. Inequality, Fiscal Progressivity and Work Disincentives” at
www.kotlikoff.net

Calculation Method – Transform ESPlanner, My Company’s Lifetime Financial

Planning Tool, which Does Consumption Smoothing Subject to Borrowing
Constraints, Into The Fiscal Analyzer (TFA).
TFA includes All Federal and State Fiscal Programs.
TFA also Calculates Its LMTRs as Expectations Over Each Households’ Potential
Survival Paths.
 Methodology

R=H+W Resources Equals Human Wealth Plus Assets

S=R–T Lifetime Spending Equals R Less Lifetime Net Taxes

τ = 1 - ΔS/ΔR = ΔT/ ΔR Remaining Lifetime Marginal Net Tax Rate

 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, Old Law for 50 Year Olds, by Quintiles and Percentiles

50.0%
45.0% 43.8%
42.0%

40.0% 38.8%
35.3% 36.3%
35.0% 32.3% 32.8% 33.3%
31.3% 31.0% 31.0%
30.0% 28.9%
27.6%
26.5%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, TCJA for 50 Year Olds, by Quintiles and Percentiles
45.0% 41.9%
40.5%
40.0%
35.9%
33.9% 34.5%
35.0% 32.1% 31.5%
29.8% 30.3% 30.3% 29.7%
30.0% 26.9%
25.0% 25.9%
25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, Old Law for 60 Year Olds, by Quintiles and Percentiles

50.0%
43.9% 43.8%
45.0%
40.1%
40.0% 36.6%
33.9% 33.0% 33.6% 33.6%
35.0% 31.9% 32.2%
30.0% 28.7% 28.3%
26.6%
25.0%
20.0% 15.9%
15.0%
10.0%
5.0%
0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, TCJA for 60 Year Olds, by Quintiles and Percentiles

45.0% 42.1%
41.0%
40.0% 38.0%
34.5%
35.0% 32.3% 31.5% 31.8% 31.8%
30.4% 29.9%
30.0% 27.5%
25.5% 26.3%
25.0%

20.0%
15.8%
15.0%

10.0%

5.0%

0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, Old Law for 70 Year Olds, by Quintiles and Percentiles
50.0%
44.5% 44.9%
45.0%
40.4%
40.0% 37.0% 36.9%
36.4%
35.0% 32.8% 33.1% 33.2%

30.0% 27.0%
25.0% 22.1% 21.8%
20.0%
15.7% 15.0%
15.0%
10.0%
5.0%
0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Median Marginal Remaining Lifetime and Current-Year Net Tax
Rates, TCJA for 70 Year Olds, by Quintiles and Percentiles
45.0% 42.7%
40.1%
40.0% 38.2%
34.8%
35.0% 33.2% 32.5%
30.9% 31.8%
30.5%
30.0%
26.8%
25.0%
21.6% 21.7%
20.0%
15.6% 14.8%
15.0%

10.0%

5.0%

0.0%
Lowest Second Third Fourth Highest Top 5% Top 1%
Median Marginal Lifetime Net Tax Rate Median Marginal Current Year Net Tax Rate
 2018 Marginal Remaining Lifetime Net Tax Rates, TCJA

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
Present Value of Lifetime Resources (Thousands)
No SS or Medicaid Receiving SS Receiving Medicaid Both SS and Medicaid
 Marginal Lifetime Net Tax Rate Breakdown
Share of Population by Percentile Range, Ages 60 - 69

70%

60%
Share of Population

50%

40%

30%

20%

10%

0%
Below 0% 0% to 20% 21% to 30% 31% to 40% 41% to 50% 51% to 60% 61% to 80% Over 80%

Marginal Tax Rate

Lowest Second Third Fourth Highest