Does It Pay Both Spouses to Work?
by Jagadeesh Gokhale and Laurence J. Kotlikoff
Table of Contents
- Executive Summary
- Calculating the Effects of Social Security on Two-Earner Couples
- Lifetime Taxes and Lifetime Transfer Benefits
- Lifetime Marginal Net Tax Rates for Working Spouses
- Components of Marginal Net Tax Rates
- The Impact of Social Security on Lifetime Marginal Net Tax Rates
- Present Value of the Loss from Forced Participation in Social Security
- About the Authors
Working couples in the United States face extremely high tax rates. Part of the reason is that some taxing mechanisms were designed years ago on the model of the one-earner household. Thus when a working man marries a stay-at-home woman, their combined income tax burden typically falls (the marriage bonus). Conversely, when two wage earners marry - as is often the case today - their income tax burden typically rises (the marriage penalty).
"Social Security was designed for a one-earner couple."
Like the income tax system, the Social Security system is best designed for a married couple in which the husband works in the labor market and the wife stays at home. At the time of retirement, the wife is entitled to a monthly benefit equal to 50 percent of her husband's benefit (the spousal benefit). If the husband dies first, a wife is entitled during her retirement years to 100 percent of her husband's benefit (the survivor benefit). This is a generous outcome, considering that the woman in this example never pays a dime in payroll taxes.
Of course, the couple's arrangement could be reversed. That is, the wife could work and the husband could stay at home. Although less than 2 percent of retirees now claiming a spousal benefit are men,1 that number is likely to grow. In any case, women, on the average, have a much greater stake in what happens during the retirement years because they live longer. Life expectancy at birth for a female is 5.7 years longer than for a male.2
In general, Social Security is much less generous to women who earn wages and pay taxes than it is to married women who remain outside the labor market. A woman can earn Social Security benefits in her own right. But she cannot claim benefits in her own right in addition to claiming spousal benefits on her husband's contributions. It must be one or the other.
Many women who have paid into Social Security over their work lives find that when they reach retirement their best option is to claim benefits on their husband's contributions.3 As a result, they get nothing in return for all the payroll taxes they paid. Others find that even if it is better to claim benefits on their own contributions, the net benefit is not much more than they would have received if they had never worked and never paid taxes.