Burman study on taxation of Social Security benefits published in National Tax Journal

May 31, 2014

The Effects of the Taxation of Social Security Benefits on Older Workers’ Income and Claiming Decisions

Leonard E. Burman, Norma B. Coe, Kevin Pierce & Liu Tian

National Tax Journal, May 2014

Leonard Burman

Public Administration & International Affairs Department

Center for Policy Research

Taxation

National Tax Journal

Leonard Burman

Social Security benefits are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage the labor supply of older workers and affect the decision to claim benefits. Using a nonparametric graphical methodology, this paper investigates whether older taxpayers reduce income to avoid the tax. While previous research found that the labor supply of older workers is significantly affected by the Social Security earnings test, the authors find little evidence of a response to benefit taxation in a large panel of data compiled from individual income tax and information returns. Similarly, while taxation of benefits provides an incentive for many to delay claiming, the authors find no evidence of such an effect. Overall, the findings suggest that older taxpayers have little understanding of the rules governing Social Security benefit taxation.