Incorporating Insurance Rate Estimates and Differential Mortality into the Net Marginal Social Security Tax Rate Calculation

This study extends the literature on net marginal tax rates created by the Social Security program by including variations in both the probability of being eligible to receive benefits and earnings-related life expectancy. Previous literature has found that women incur a lower net marginal tax rate because they have longer life expectancies. The results in this article indicate that including variations in eligibility for benefits partially reverses this result by increasing net marginal Social Security tax rates for older women. Furthermore, the existing literature has shown that low-earnings households pay lower net marginal tax rates because the benefit formula is progressive. Including variations in life expectancy reduces but does not eliminate this result. This implies that differential mortality increases the net marginal Social Security tax rates incurred by low-earnings households. These results are important from a policy standpoint, given the current debate on the future of the Social Security system.