Is the Social Security Payroll Tax a Tax?

Abstract

Social security benefits are linked directly to earnings through the social security benefit formula. Hence, the marginal increment in benefits due to increased earnings offsets to some degree the marginal increment in taxes. We show that the true life-cycle payroll tax rate for a given legislated rate differs systematically by age, year of birth, marital status, and life expectancy. For many workers, during some part of their life the true life-cycle payroll tax is in fact a subsidy. Changes in the tax and benefit rules over the last decade have reduced the subsidy for current workers. Major changes brought about under the 1983 amendments to the Social Security Act have furthered this trend. Even though benefit reductions in the 1983 act will not be fully in place until well into the next century, their effect on the true payroll tax rates on young workers is already being felt.