Problem

1. Under current law, most Social Security recipients do not have to pay federal or state income taxes on their Social Security benefits. Suppose the government proposes to tax these benefits at the same rate as other types of income. What would be the impact of the proposed tax on the optimal retirement age?

2. Consider the following proposed changes to the current Social Security earnings test and determine if the changes lead to higher hours of work among retirees.

a. A change in the amount of exempt labor earnings, from $17,000 to $25,000.

b. An increase in the implicit tax rate from 33 to 50 percent.