Many older workers face higher tax rates
Workers in their 60s face a doubleedged sword. While they’re delighted to keep working, they face high tax rates — considerably higher than the rates paid by millionaires and billionaires, according to a study conducted by Boston University economist and researcher Laurence Kotlikoff.
Kotlikoff, a senior fellow at the Goodman Institute, produced the study with Alan Auerbach, an economist at the University of California at Berkeley, and two additional authors.
“Senior workers earning an average income can easily lose more than half of their earnings to higher taxes and reduced government benefits,” Kotlikoff said. “In some cases, workers can lose 95 cents out of each dollar they earn.”
The good news is that millions of older workers are mentally and physically capable of making major contributions to our economy, said Kotlikoff. The bad news is that the nation is worse off when these people are pushed out of the workforce by policies that encourage them to
retire, Kotlikoff said.
The study found that the Social Security Administration is a source of penalties for working: For instance: » Beyond a certain income level, early retirees from age 62 to 66 lose 50 cents of Social Security benefits for each dollar they earn — a 50 percent tax rate. » From Jan. 1 in the year in which they turn 66 until their 66th birthday, they lose 33 cents of benefits for each dollar of wages — a 33 percent tax rate.
These taxes are on top of income, payroll and other taxes. Although the government begins adding the benefit reduction back once the worker reaches the normal retirement age, many seniors don’t realize that or don’t understand it.
“If we abolished these ‘earning penalties,’ the government would probably be a net winner. Seniors would work more and earn more and the other taxes they pay would more than make up for any short-term revenue loss,” Kotlikoff said.
Another impediment to work is the Social Security benefits tax. Here’s why: » Beyond a certain threshold, seniors must pay income taxes on 50 cents of Social Security benefits for each dollar they earn — increasing their marginal tax rate by 50 percent. » If they earn even more income, they will reach a point where they must pay income taxes on 85 cents of Social Security benefits for each dollar they earn, increasing their marginal tax rate by 85 percent.
When the Social Security benefits tax is added to the earnings penalty, the tax rate on moderateincome seniors actually can reach 95 percent.
The Social Security benefits tax also imposes high rates on savings. For example, for someone in the 15 percent bracket for ordinary income. Here’s how: » The Social Security benefits tax can increase the tax rate on pension income and IRA withdrawals from 15 percent to 27.75 percent. » It can raise the tax on capital gains and dividend income from zero to 12.75 percent, and tax exempt income can be taxed at a rate of 12.75 percent.
These tax rates only impact those in the middle of the income ladder, Kotlikoff said. They don’t affect the work incentives of the rich or the poor. But, “the loss of the Earned Income Tax Credit and the potential loss of Medicaid and other entitlement benefits create high marginal tax rates for low-income workers.”