U-M: Pay Hike For Older Workers Could Cut National Debt

ANN ARBOR (WWJ) Could the United States government significantly reduce the national debt by cutting the payroll taxes of older workers and encouraging them to stay in the workforce?

University of Michigan economist and researcher Dan Silverman says "yes." He goes even further than that, saying the government could save money by giving every U.S. worker an automatic 10 percent pay raise at age 55, which, he believes would convince most people to work quite a bit longer to enjoy the extra income before they retired.

By eliminating Social Security payroll taxes starting when workers are 55 years old, the study shows that take-home pay would jump by 10.6 percent and they would work 1.5 years longer on average, paying more income taxes and helping to reduce the federal deficit.

"People are living longer, healthier lives, and so far have opted to take most of that extra time as additional retirement rather than work," said U-M economist John Laitner, who conducted the analysis with Silverman."We are proposing a way of responding to this situation through targeted tax-rate changes that would reward older workers for staying on the job and also benefit the economy as a whole."

Silverman and Laitner said they've run the numbers and these are the results: If you charge a worker zero for Social Security taxes when he or she reaches the age of 55 -- but they keep working -- it would save big bucks in Medicare and Social Security payouts.

"The population of the United States is getting older and older, for every working person we have more and more retirees who are being supported through taxes by those younger workers. Medicare is an important fiscal draw and so is Social Security," Silverman said.

Using data from the ISR Health and Retirement Study and from the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics, Laitner and Silverman explore how tax cuts targeted at older workers would affect the likelihood of working longer and the size of the federal deficit. Both Laitner and Silverman are affiliated with the U-M Retirement Research Center, based at the U-M Institute for Social Research. Their analysis appears in the current issue of The Journal of Public Economics.

Workers would need to pay about 1 percent higher payroll taxes a year until age 55 in order for the Social Security system to break even, the researchers show. This would mean that over their lifetimes, households would pay about $15,000 more in Federal income tax, providing welcome reductions in the Federal deficit.

And workers age 55 and over would see their after-tax earnings increase by a healthy 10.6 percent – inducing them to work longer and enjoy the extra income. Work years beyond age 54 would not affect benefits, and as in the current system, workers could claim benefits as early as age 62 although waiting until full retirement age would continue to be rewarded with higher benefit levels.

"We think the additional income taxes that would generate would be on the order of $5,000 per household so if you start from the very beginning and think about 100 million households, that's a very big number," Silverman said.