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How Will Higher Tax Rates Affect the National Retirement Risk Index?

Author

Listed:
  • Alicia H. Munnell
  • Anthony Webb
  • Francesca Golub-Sass

Abstract

The National Retirement Risk Index (NRRI) measures the share of American households ‘at risk’ of being unable to maintain their pre-retirement standard of living in retirement. The calculations are based on the assumption that taxes remain at current levels. But federal government spending as a percentage of GDP is projected to increase rapidly in coming decades. To help bridge the gap between revenue and spending, policymakers could decide to substantially increase the personal income tax, raise Social Secu­rity payroll taxes, and establish additional revenue sources such as a value-added tax. This brief explores how such tax increases could affect the percentage of households ‘at risk.’ This brief is structured as follows. The first section recaps the NRRI. The second describes how much taxes could increase. The third section describes the channel through which higher taxes may affect retire­ment preparedness. The fourth section presents the impact of plausible tax increases on the percentage of households ‘at risk.’ The final section concludes that higher taxes will have a relatively modest effect on the NRRI for most groups – the exception being high-income households on the cusp of retirement. It also cautions that the effect could be substantially greater if people reduce their saving in response to an unprecedented increase in taxes, and that the increase in the NRRI tells only half the story because economic well-being as measured by consumption will be lower both before and after retirement.

Suggested Citation

  • Alicia H. Munnell & Anthony Webb & Francesca Golub-Sass, 2010. "How Will Higher Tax Rates Affect the National Retirement Risk Index?," Issues in Brief ib2010-19, Center for Retirement Research, revised Dec 2010.
  • Handle: RePEc:crr:issbrf:ib2010-19
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    File URL: http://crr.bc.edu/briefs/how-will-higher-tax-rates-affect-the-national-retirement-risk-index/
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    Cited by:

    1. Alexander Zimper & Alexander Ludwig & Max Groneck, 2012. "A Life-Cycle Consumption Model with Ambiguous Survival Beliefs," 2012 Meeting Papers 693, Society for Economic Dynamics.
    2. repec:mea:meawpa:13270 is not listed on IDEAS
    3. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2013. "Ambiguous Survival Beliefs and Hyperbolic Discounting in a Life-Cycle Model," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79878, Verein für Socialpolitik / German Economic Association.

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