The Effects of the Taxation of Social Security Benefits on Older Workers' Income and Claiming Decisions

Social Security benefits are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage the labor supply of older workers and affect the decision to claim benefits. Using a nonparametric graphical methodology, this paper investigates whether older taxpayers reduce income to avoid the tax. While previous research found that the labor supply of older workers is significantly affected by the Social Security earnings test, we fin little evidence of a response to benefit taxation in a large panel of data compiled from individual income tax and information returns. Similarly, while taxation of benefits provides and incentive for many to delay claiming, we find no evidence of such an effect. Overall, the findings suggest that older taxpayers have little understanding of the rules governing Social Security benefit taxation.