Would getting an automatic 10 percent pay raise in your combined household paychecks at age 55 keep you on the job longer?
University of Michigan economists John Laitner and Dan Silverman have researched the question and believe that on average, this kind of boost would keep people working another year and a half, which would give them more money to live on in retirement and increase the amount of income taxes they pay, which would be good for the country -- a retirement planning win-win.
Here's how they see this idea working.
Using data from the university's Institute for Social Research Health and Retirement Study and from the Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics, Laitner and Silverman calculated that if workers paid an additional 1 percent in payroll tax over their pre-55 working lives, they could stop paying payroll taxes at age 55 and the effect on Social Security revenue would be neutral.
Workers who left the workforce early would miss out on the reward of avoiding payroll taxes, while those who stayed in the labor force would get the significant pay increase created by being able to skip paying payroll taxes. The longer they work, the bigger the reward.
Laitner says that for about 80 percent of people, quitting early is a lifestyle choice -- one that is very expensive for both Social Security and the rest of the U.S. budget, not only because they start collecting Social Security early, but also -- and more significantly -- they pay far less in income taxes. Keeping people over 55 working another year and a half would increase what they pay in income taxes by an average of $14,000 per household, Laitner calculates, a number that would go a long way toward reducing the federal deficit.
"This plan gives people a choice between the value of work and the value of leisure, and we think the value of work will win," if the plan were adopted, Leitner says.
This blog post originally contained an estimate of how much it would cost the average household if workers paid an additional 1 percent in payroll taxes. The number has been removed because it represented an estimate that could vary widely.