Researchers warn of financial risks in retirement jobs

Many workers heading into retirement are woefully unprepared financially and have no idea of the tax impacts of taking on a part-time job to ease the fiscal pain, researchers warn. (Image courtesy of Creative Commons.)

Many workers heading into retirement are woefully unprepared financially and have no idea of the tax impacts of taking on a part-time job to ease the fiscal pain, researchers warn. (Image courtesy of Creative Commons.)

Any of the 10,000 Baby Boomers retiring every day who are contemplating a second job in their retirement may want to reconsider, due to an unfamiliar network of federal and state taxes that can serve as significant work disincentives, advises a UC Berkeley economist and professor of law and a team of fellow researchers.

In “Is Uncle Sam Inducing the Elderly to Retire?” — a working paper published by the National Bureau of Economic Research, a team that includes Alan Auerbach, a UC Berkeley professor and director of the Robert D. Burch Center for Tax Policy and Public Finance at UC Berkeley — suggests that prospective retirees can forget the Social Security Administration-provided benefit calculations that come in the mail.

“They’re completely meaningless,” says Auerbach.

He says they simply don’t factor in the implicit and explicit taxes that those ages 50 through 79 face from the offsets between income, age and benefits.

Auerbach said the research highlights a need for much more transparency in the nation’s retirement and fiscal systems.

The Social Security Administration could provide the information, he said, but likely needs a push to do so by “someone in government who thinks it’s important.” That someone, Auerbach suggested, could be in the presidential administration or in Congress.

Auerbach and his fellow researchers — Laurence Kotlifkoff, of Boston University and the Fiscal Analysis Center; Darryl Koehler, of Economic Security Planning Inc. and the Fiscal Analysis Center; and Manni Yu, of Boston University — did the math using data collected from older respondents to the Federal Reserve’s 2013 Survey of Consumer Finances and special software they developed.

The Fiscal Analyzer incorporates all major federal and state fiscal programs — such as federal corporate income tax, personal federal and state income taxes, state sales taxes, estate taxes, Social Security benefits, food stamps, disability benefits, Medicare and Medicaid benefits and premiums and Federal Insurance Contributions Act (FICA) taxes — and calculates remaining lifetime marginal net tax rates. 

First, the good news

“We find that working longer, say an extra five years, can raise older workers’ sustainable living standards,” they report in their paper.

Taking a second job to supplement income during retirement can prove costly, researchers warn. (Creative Commons photo.)

Taking a second job to supplement income during retirement can prove costly, researchers warn. (Creative Commons photo.)

But the researchers report the impact is far smaller than suggested, in large part due to high net taxation of labor earnings. They also warn that many boomers now face or will face extremely high work disincentives arising from the hodgepodge and uncoordinated design of the nation’s fiscal system.

“Our findings show that older workers typically face high, very high or remarkably high marginal net taxation on their extra earnings,” they write, adding that work disincentives are highest for those at the bottom and top levels of resource distribution.

Don’t let the door hit you…

“Our findings suggest that Uncle Sam is, indeed, inducing the elderly to retire,” they conclude.

“Of particular concern is Medicaid and Social Security’s complex earnings test and clawback of disability benefits,” the researchers summarized. A clawback is the recovery of funds disbursed by a company, pension or government.

“But an open question is the extent to which the elderly correctly perceive these disincentives,” the report says. “Indeed … it’s hard to believe that policymakers, themselves, are cognizant of the level and spread of the work disincentives they are imposing on the elderly.”

The researchers found that the marginal net tax rate linked to a significant increase in retirement earnings, such as $20,000 a year from a part-time job, can for many elderly be “dramatically higher than that associated with earning a relatively small, say $1,000 a year, extra amount of money.”

Many baby boomers face fairly grim financial realities in retirement, and researchers say more government transparency around taxes and benefits is needed to help them assess their futures. (Image courtesy of Creative Commons.)

Many baby boomers face fairly grim financial realities in retirement, and researchers say more government transparency around taxes and benefits is needed to help them assess their futures. (Image courtesy of Creative Commons.)

For the 20 percent of the population aged 50 to 79 with the lowest incomes, earning an extra $1,000 raises a household’s expected value of lifetime spending by just around $700, which translates into a 30 percent marginal net tax rate. Even an extra $10,000 of lifetime earnings means another roughly $6,000 in lifetime spending, and a 40 percent remaining lifetime net tax rate on those additional earnings.

Other financial tradeoffs or exchanges cited by the research team include:

  • Medicare income limits, Social Security earnings test limits for those retiring before the current full retirement age of 66 and Social Security income tax thresholds.
  • Increased premiums for Medicare Part B for retirees earning more money.
  • Rising out-of-pocket healthcare costs through higher premiums, higher Medicare Part B co-payments and outpatient care not covered by Part B, as well as projected increases in prescription drug expenses.
  • Implicit taxes linked to government benefits such as food stamps.

From bad to worse?

All this is set against a backdrop of an already grim financial picture for many baby boomers’ golden years. Only 67 percent of them have any retirement account, and many of those have very low balances. Forty percent of boomers have no retirement savings at all.

While Social Security was designed as a basic floor for retirees’ living standards, it actually provides at last 90 percent of more than a third of elderly households’ income. Nearly two-thirds of older households rely on Social Security for at least half of their income.

Meanwhile, prospects of increased Social Security benefits to help boomers are dim. Social Security already is 32.2 percent underfunded, according to current actuarial projections.