Women, Taxes and Social Security

1. Women, Taxes and Social Security • Income Taxes • Social Security

2. The Marriage Tax/Subsidy • The income tax system in the U.S. is arranged in a such a manner as to reward some people for being married with lower taxes and to punish other people with higher taxes for being married.

3. Under the system in place from 1949-1969, married couples paid a lower marginal tax rate than the single person making the same amount of money . • There was, that is, a marriage subsidy.

5. In 1969, the system was changed to address this disparity. • This has led to a system today in which there may be a tax or a subsidy for being married.

8. Married couples with two earners who earn roughly equal incomes are much more likely to pay a marriage penalty, while married couples with only one earner or with one high earner and one who earns relatively little are likely to receive a marriage subsidy. • Supports traditional family structure

9. Black couples more likely to pay penalty because it’s more likely both will work and that incomes will be similar.

10. This means households that specialize will have additional gains to marriage. • Households that do not specialize will have even smaller gains to marriage. • Empirical research suggests that the effects on decisions to get married are small but statistically significant.

11. Taxes and Labor Supply • Progressive tax system based on taxing families instead of individuals means that the earnings of a sequentially secondary earner are taxed at a higher marginal rate.

12. Higher marginal tax rate means that household production has lower opportunity cost. • Lower wage should mean less leisure, if leisure is a normal good. • Therefore, theoretically, the overall impact on labor supply is ambiguous.

13. Empirical research suggests that reductions in tax rates do increase both the hours worked and labor force participation

14. Tax reform and the marriage tax • Marriage tax/subsidy could be eliminated by: • Taxing individuals rather than families • Get rid of progressivity (flat tax) • Tax household production

15. Taxes and fertility • Virtually all developed countries provide child allowances (except U.S.) • U.S. allows personal exemptions, which function in much the same way. • It is estimated that personal exemptions cover 4-9% of the $136,320 out-of-pocket expenses of raising a child to age 18.

16. Empirical research suggests that changes in the value of the personal exemption do exert a small but non-negligible effect on fertility decisions.

17. EITC and the Marriage Penalty/Bonus • Under certain circumstances, there may be a substantial penalty or bonus for being married from the EITC. • If an earner without children marries a non-earner with children, benefits from EITC increase sharply. • If two earners marry, they may be pushed into the phaseout range of EITC, producing a significant penalty.

18. If a low earner marries a high earner, EITC benefits that would be received by the low earner are lost. • Empirical research suggests that EITC penalizes marriage much more often than it reward marriage.

19. Social Security • Created in 1935 • “Pay as you go” system • Financed by regressive payroll tax • People can collect partial benefits at 62, full benefits at 65 • Benefit level depends on earnings, length of employment

20. If a woman works and pays SS payroll taxes for 10 years, she can collect benefits based on her own earnings. • Or she can collect 50% of her husband’s benefits, but not both. • This supports traditional family structure if wife’s earnings are low.

21. Women, Retirement and Social Security • Women have longer life-expectancy • Women earn less than men • Women are less likely to have pensions • Elderly women are much more likely to be poor than elderly men • Women who are divorced before 10 years of marriage receive no benefits from husband

22. ~60% of SS recipients are women • SS is only source of income for 26% of elderly unmarried women • SS has greatly reduced poverty among the elderly in general, and among elderly women

23. Divorced elderly women have 20.4% poverty rate • Elderly widows 15.9% poverty rate • Never married elderly women 18.9% • Elderly married women 4.3% • 29% of poor women are over 65

24. If a couple is on SS, receiving 150% of the husband’s benefit, and the husband dies, the wife loses 1/3 of the SS benefit. • She loses economies of scale. • As LF participation of women increases, more women are receiving benefits based on their own earnings.

25. Behavioral Incentives of SS • Women lose ability to collect on the basis of husband’s earnings if they remarry before age 60. • Provides incentive not to remarry

26. Behavioral Incentives of SS • If SS recipients earn money above a threshold, their benefits are “taxed” away. • Provides an incentive not to work • Little empirical evidence that this incentive actually kept people from working

27. Women and Pensions • 2 types of pensions • Defined benefits plans • Defined contribution plans

28. Defined Contribution Plans • Becoming more important • Shorter vesting period • Greater portability

29. Women are less likely to have any pension than men • Women’s pensions are likely to be smaller • “Pension gap” has been narrowing since the 1970s • Pension coverage for current full-time workers is about equal

30. Nearly all the differences in retirement income that exist between men and women are due to: • Women earn less • Women have intermittent LF participation • Women work in lower paying occupations • As these differences erode, the retirement gap should shrink

31. Possible Changes to SS • Exempt secondary earners from taxes until they qualify for their own benefits • Increasing spouse benefit available to divorced women from 50% to 75% • Earnings sharing