How Does the Personal Income Tax Affect the Progressivity of OASI Benefits?

Center for Retirement Research at Boston College Working Paper No. 2011-21

31 Pages Posted: 10 Dec 2011

See all articles by Norma Coe

Norma Coe

University of Pennsylvania - Perelman School of Medicine

Zhenya Karamcheva

Boston College - Center for Retirement Research

Richard W. Kopcke

Federal Reserve Bank of Boston

Alicia H. Munnell

Boston College - Center for Retirement Research

Date Written: November 10, 2011

Abstract

This study calculates the impact of federal income taxes on the progressiveness of the Old Age and Survivors Insurance (OASI) program. It uses the Health and Retirement Study (HRS) data linked with the Social Security Earnings Records to estimate OASI contributions and benefits for individuals and households, before and after income taxes, for three birth cohorts. It uses two measures of progressivity: redistribution by decile (the difference between the share of total benefits received and the share of total taxes paid) and “effective progression” (the change in the Gini coefficient). Under both measures, the results without the income tax confirm previous findings: Social Security is progressive on an individual basis, but that progressivity is dramatically cut when one calculates it on a household basis. Adding income taxes could make the program either more or less progressive. On the one hand, the tax treatment of contributions makes the system even less progressive than generally reported. On the other hand, the taxation of benefits makes it more progressive. The net result is that adding the personal income tax to the analysis makes Social Security more progressive than without taxes, on both the individual and household bases. Importantly, however, the impact of taxation on redistribution increases significantly among younger cohorts. Under current law, the Social Security system becomes more progressive over time.

Keywords: OASI, federal income taxes, Health and Retirement Study, HRS, social security

JEL Classification: J26, H55, H51

Suggested Citation

Coe, Norma and Karamcheva, Zhenya and Kopcke, Richard and Munnell, Alicia, How Does the Personal Income Tax Affect the Progressivity of OASI Benefits? (November 10, 2011). Center for Retirement Research at Boston College Working Paper No. 2011-21. Available at SSRN: https://ssrn.com/abstract=1970311 or http://dx.doi.org/10.2139/ssrn.1970311

Norma Coe (Contact Author)

University of Pennsylvania - Perelman School of Medicine ( email )

423 Guardian Drive
Philadelphia, PA 19104
United States

Zhenya Karamcheva

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

Richard Kopcke

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3099 (Phone)
617-973-3957 (Fax)

Alicia Munnell

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

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