Making Work Pay For The Elderly: Laurence Kotlikoff

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 Social Security Spousal, State Income Taxes
Dividend and Cap Gains Taxes Widow(er), Divorced Spousal, State Corp Income Taxes
Alternative Minimum Tax Divorced Widow(er), Child City Income Taxes
Taxation of Social Security Benefits Benefits State Sales Taxes
Medicare High-Income Taxes Recomputation of Benefits State Estate Taxes
Phase Out of Deductions and Adjustment of SS Early Benefit Loss of Medicaid Benefits
Exemptions Reduction Factors Loss of Medicaid’s Medicare
Federal Corporate Income Tax Delayed Retirement Credits Premium Payment
Federal Excise Taxes Medicare FICA Tax TANF (Loss of Welfare Benefits)
Federal Estate and Gift Taxes Medicare Part B Premiums Generation Skipping Trusts
Social Security FICA Tax Medicare Benefit Loss Subsidy to Imputed Rent
Social Security Earnings Test Obamacare Subsidies Charitable Deductions
SS Disability Benefit Loss Food Stamps State/Local Tax Deductions
SSI Benefit Loss Earned Income Tax Credit

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
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%
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%
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%
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%
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%
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

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Making Work Pay For the Elderly

Many/Most Poorly Prepared to Pay for Retirements

More, But, Like All Americans, they

Face a Plethora of Work Disincentives

SSI Benefit Loss Earned Income Tax Credit

Incentive to Work Also Depends on the Extra Benefits We

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

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

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

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

Marginal Tax Rate

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