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

November 21, 2011
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Working Paper by Norma B. Coe, Zhenya Karamcheva, Richard W. Kopcke, and Alicia H. Munnell

Abstract

This study calculates the impact of federal income taxes on the progressivity 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 has only a small impact on Social Security’s progressivity, as large effects of the specific provisions mainly offset one another. Net tax effects do, however, appear to add to progressivity over time due to the increasing percentage of households subject to taxation on their benefits. With no changes in tax laws, this trend toward greater progressivity is likely to continue.

Cheerful senior man at home looking at his mail
Cheerful senior man at home looking at his mail
Author(s)
Headshot of Norma B. Coe
Norma B. Coe
Headshot of Zhenya Karamcheva
Zhenya Karamcheva
Headshot of Richard W. Kopcke
Richard W. Kopcke
Headshot of Alicia H. Munnell
Alicia H. Munnell
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Executive Summary
Citation

Coe, , Zhenya Karamcheva, Richard W. Kopcke, and Alicia H. Munnell. 2011. "How Does the Personal Income Tax Affect the Progressivity of OASI Benefits?" Working Paper 2011-21. Chestnut Hill, MA: Center for Retirement Research at Boston College.

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Other Project Publications
  • Issue Brief
Associated Project(s)
  • BC11-01
Topics
Social Security
Publication Type
Working Paper
Publication Number
WP#2011-21
Sponsor
U.S. Social Security Administration
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