from the Chicago Fed
— this post researched by Abdoulaye Ndiaye, research economist and summarized by Lisa Camner McKay, economics writer
The biggest social safety net in the United States is the Social Security program, which provides retirement benefits totaling almost $900 billion to 54 million individuals.2 When planning when to retire, individuals consider not only their health and personal savings but how their Social Security retirement benefits compare with their after-tax income when working: When can they afford to retire?
It is a concern for all but the wealthiest, then, that Social Security faces insolvency. The U.S. Social Security Administration predicts that in 2020, the costs of the program will exceed its income.3 This suggests it is critical for policymakers to evaluate whether there is a path for Social Security reform that will improve people’s welfare both before and after retirement while restoring the program’s solvency.
The goal of social insurance is to provide compensation to individuals with low incomes. The program must be funded by taxes, however, which can act as a disincentive to work and thus may reduce economic growth. These two elements, social insurance, and economic efficiency must be balanced in order to restore solvency to Social Security. Furthermore, in the case of Social Security specifically, the costs of the program are affected by the age at which workers retire. In a system in which workers can decide for themselves when they will retire, this decision is a function of how much the worker would receive in retirement benefits compared with how much the worker earns in after-tax income. The income tax, in other words, affects the retirement decision. For these reasons, it is useful to look at Social Security and tax reforms together.
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Source
http://app.frbcommunications.org/e/er?s=1064&lid=6544&elqTrackId=4558E86D768FD6409B828E5B7DF7324A &elq=1202b09b6adb42439d0de8e8dbc2b431&elqaid=15 708 &elqat=1
