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Work incentives in the Social Security Disability benefit formula

Published online by Cambridge University Press:  15 April 2018

GOPI SHAH GODA ,
JOHN B. SHOVEN  and
SITA NATARAJ SLAVOV
GOPI SHAH GODA
Affiliation:
Stanford University and NBER, Stanford, California, USA
JOHN B. SHOVEN
Affiliation:
Stanford University and NBER, Stanford, California, USA
SITA NATARAJ SLAVOV
Affiliation:
George Mason University and NBER, Arlington, Virginia, USA (e-mail: sslavov@gmu.edu)
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Abstract

We examine the connection between taxes paid and benefits accrued under the Social Security Disability Insurance (SSDI) program on both the intensive and extensive margins. We perform these calculations for stylized workers given the existing benefit structure and disability hazard rates. On the intensive margin, we examine the effect of an additional dollar of earnings on the marginal payroll taxes contributed and future benefits earned. We find that the present discounted value of disability benefits received from an additional dollar of earnings, net of the SSDI payroll tax, generally declines with age, becoming negative around age 40 and reaching almost zero at age 63. On the extensive margin, we determine the effect of working an additional year on the additional payroll taxes and future benefits as a percentage of income. The return to working an additional year at an income level just large enough to earn Social Security credits for the year is large and positive through age 60. However, the return to working an additional full year is substantially smaller and becomes negative at approximately age 57. Thus, older workers face strong incentives to earn enough to obtain creditable coverage through age 60, but they face disincentives for additional earnings. In addition, workers aged 61 and older face work disincentives at any level of earnings. We repeat this analysis for stylized workers at different levels of earnings and find that, while the program transfers resources from high earners to low earners, the workers experience similar patterns in the returns to working.

Keywords

H31H53J22J26Social Security Disability Insurancetax rateswork incentivesretirementolder workers
Type
Article
Information
Journal of Pension Economics & Finance , Volume 18 , Issue 2 , April 2019 , pp. 165 - 189
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

This research was supported by the Mercatus Center at George Mason University. The findings and conclusions expressed are solely those of the authors.

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