Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

2 Issues per year


IMPACT FACTOR 2016: 0.043
5-year IMPACT FACTOR: 0.376

CiteScore 2016: 0.36

SCImago Journal Rank (SJR) 2016: 0.312
Source Normalized Impact per Paper (SNIP) 2016: 0.272

Online
ISSN
1935-1690
See all formats and pricing
More options …

Can removing the tax cap save Social Security?

Shantanu Bagchi
  • Corresponding author
  • Department of Economics, Towson University, 8000 York Road, Towson, MD 21252, USA, Phone: +1-410-704-2191
  • Email:
Published Online: 2017-07-04 | DOI: https://doi.org/10.1515/bejm-2016-0091

Abstract

The maximum amount of earnings in a calendar year that can be taxed by Social Security is currently set at $118,500. In this paper, I examine if removing this cap can solve Social Security’s future budgetary problems. I find that when this cap is removed, benefits need to decline by less than 4% to keep Social Security solvent, compared to by almost 12% when the cap is held fixed at its current level. Households for whom the cap expires respond by working and saving less, which reduces labor supply, capital stock, and output, and also reverses some of the initial expansion in Social Security’s revenues. Elimination of the cap alters the pattern of redistribution implicit in Social Security, and also imposes larger distortions on labor supply and saving, which reduces overall welfare.

Keywords: Social Security; tax cap; mortality risk; labor income risk; incomplete markets; general equilibrium

JEL Classification: E21; E62; H55

References

  • Altig, D., A. J. Auerbach, L. J. Kotlikoff, K. A. Smetters, and J. Walliser. 2001. “Simulating Fundamental Tax Reform in the United States.” The American Economic Review 91 (3): 574–595.CrossrefGoogle Scholar

  • Arias, E 2004. “United States Life Tables, 2001.” National Vital Statistics Reports 52 (14).Google Scholar

  • Auerbach, A., and L. Kotlikoff. 1987. Dynamic Fiscal Policy. Cambridge University Press: Cambridge.Google Scholar

  • Bagchi, S 2015. “Labor Supply and the Optimality of Social Security.” Journal of Economic Dynamics and Control 58: 167–185.CrossrefWeb of ScienceGoogle Scholar

  • Bagchi, S 2016. “Is The Social Security Crisis Really as Bad as We Think?” Macroeconomic Dynamics 20 (3): 737–776.Web of ScienceCrossrefGoogle Scholar

  • Bagchi, S., and J. Feigenbaum. 2014. “Is Smoking a Fiscal Good?” Review of Economic Dynamics 17 (1): 170–190.Web of ScienceCrossrefGoogle Scholar

  • Bullard, J., and J. Feigenbaum. 2007. “A Leisurely Reading of the Life-Cycle Consumption Data.” Journal of Monetary Economics 54 (8): 2305–2320.CrossrefGoogle Scholar

  • Conesa, J. C., and C. Garriga. 2008. “Optimal Fiscal Policy In The Design Of Social Security Reforms.” International Economic Review 49 (1): 291–318.Web of ScienceCrossrefGoogle Scholar

  • Conesa, J. C., and C. Garriga. 2009. “Optimal Response to a Transitory Demographic Shock in Social Security Financing.” Federal Reserve Bank of St. Louis Review 91 (1): 33–48.Google Scholar

  • Conesa, J. C., and D. Krueger. 1999. “Social Security Reform with Heterogeneous Agents.” Review of Economic Dynamics 2: 757–795.CrossrefGoogle Scholar

  • De Nardi, M., S. İmrohoroğlu, and T. J. Sargent. 1999. “Projected U.S. Demographics and Social Security.” Review of Economic Dynamics 2 (3): 575–615.CrossrefGoogle Scholar

  • De Nardi, M., E. French, and J. B. Jones. 2010. “Why Do the Elderly Save? The Role of Medical Expenses.” Journal of Political Economy 118 (1): 39–75.Web of ScienceCrossrefGoogle Scholar

  • Heathcote, J., K. Storesletten, and G. L. Violante. 2010. “The Macroeconomic Implications of Rising Wage Inequality in the United States.” Journal of Political Economy 118 (4): 681–722.CrossrefWeb of ScienceGoogle Scholar

  • Heathcote, J., K. Storesletten, and G. L. Violante. 2014. “Optimal Tax Progressivity: An Analytical Framework.”.Working Paper 19899, National Bureau of Economic Research.Google Scholar

  • Huang, H., S. İmrohoroğlu, and T. J. Sargent. 1997. “Two Computations to Fund Social Security.” Macroeconomic Dynamics 1 (1): 7–44.CrossrefGoogle Scholar

  • Huggett, M., and G. Ventura. 1999. “On the Distributional Effects of Social Security Reform.” Review of Economic Dynamics 2 (3): 498–531.CrossrefGoogle Scholar

  • İmrohoroğlu, S., and S. Kitao. 2009. “Labor Supply Elasticity and Social Security Reform.” Journal of Public Economics 93 (7–8): 867–878.Web of ScienceCrossrefGoogle Scholar

  • İmrohoroğlu, S., and S. Kitao. 2012. “Social Security Reforms: Benefit Claiming, Labor Force Participation, and Long-Run Sustainability.” American Economic Journal: Macroeconomics 4 (3): 96–127.Google Scholar

  • İmrohoroğlu, A., S. İmrohoroğlu, and D. H. Joines. 2003. “Time-Inconsistent Preferences and Social Security.” The Quarterly Journal of Economics 118 (2): 745–784.CrossrefGoogle Scholar

  • Jeske, K 2003. “Pension Systems and Aggregate Shocks.” Federal Reserve Bank of Atlanta Economic Review (Q1): 15–31.Google Scholar

  • Karabarbounis, M 2012. “Heterogeneity in labor supply elasticity and optimal taxation.”. In 2012 Meeting Papers. No. 655. Society for Economic Dynamics.Google Scholar

  • Kitao, S 2014. “Sustainable Social Security: Four Options.” Review of Economic Dynamics 17 (4): 756–779.Web of ScienceCrossrefGoogle Scholar

  • Nishiyama, S., and K. Smetters. 2005. “Does Social Security Privatization Produce Efficiency Gains?.”.Working Paper 11622, National Bureau of Economic Research.Google Scholar

  • Nishiyama, S., and K. Smetters. 2008. “The Optimal Design of Social Security Benefits.”.Working Papers wp197 University of Michigan, Michigan Retirement Research Center.Google Scholar

  • Rogerson, R., and J. Wallenius. 2009. “Micro and Macro Elasticities in a Life Cycle Model with Taxes.” Journal of Economic Theory 144 (6): 2277–2292.CrossrefWeb of ScienceGoogle Scholar

  • Sanders, B 2015. Social Security Expansion Act. Legislative proposal, United States Senate.Google Scholar

  • Shrestha, L. B 2006. “Life Expectancy in the United States.”.CRS Report for Congress RL32792, Congressional Research Service.Google Scholar

  • Smetters, K 2003. “Is the Social Security Trust Fund Worth Anything?.”.Working Paper 9845 National Bureau of Economic Research.Google Scholar

  • Stokey, N. L., and S. Rebelo. 1995. “Growth Effects of Flat-Rate Taxes.” Journal of Political Economy 103 (3): 519–550.CrossrefGoogle Scholar

  • Tauchen, G., and R. Hussey. 1991. “Quadrature-based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models.” Econometrica 59 (2): 371–396.CrossrefGoogle Scholar

  • Zhao, K 2014. “Social Security and the Rise in Health Spending.” Journal of Monetary Economics 64: 21–37.Web of ScienceCrossrefGoogle Scholar

About the article

Published Online: 2017-07-04


Citation Information: The B.E. Journal of Macroeconomics, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2016-0091.

Export Citation

©2017 Walter de Gruyter GmbH, Berlin/Boston. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in