Older Americans Face a Rash of Tax and Policy Disincentives to Continue Working

By Chris Adams

Does the government want people work longer? If so, why are there so many policies that work to push people out of the labor force?

Laurence Kotlikoff, a professor of economics at Boston University, has analyzed the wide range of tax and benefit policies that, when taken together, siphon away people’s income and net worth. It’s not just the obvious ones, such as the Social Security earnings test, but implicit taxation such as the loss of food stamps and increased premiums for Medicare Part B.

Taken together, those explicit and implicit taxes can limit the willingness of older Americans to work harder and longer.

This comes as baby boomers are facing a highly strained Social Security system that will be hard-pressed to boost benefits. So boomers must fend for themselves to rescue their retirements – namely by working harder and longer, he said. But if they do so, they face tax and other policies that treat different kinds of income differently.

“This is a crazy, wacky fiscal system,” he told a group of National Press Foundation fellows as he described the different programs and tax systems. “Why are we telling some people that if you earn a dollar you can keep most of it – but tell others that if you earn a dollar, you’ll lose a dollar?”

He added: “We have a lot of people who are being locked into poverty.”

While working an extra five years can raise older workers’ living standards, the impact is far smaller than often expected because of the high net taxation of labor earnings, he said.

This program is funded by the Alfred P. Sloan Foundation. NPF is solely responsible for the content.

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