It doesn't matter what individuals may do, it is what people do in aggregate that matters. In the aggregate people have to behave rationally, otherwise we will notice massive dis-equilibrium in the economy, which we don't. In fact, a lot of honest behavioral economists will admit that in the aggregate people are a lot more rational than we think they are.
I will tell you why people will work longer. Keeping wages constant, if the marginal output of labor increased your marginal wages/wealth you will increase the output of labor. In countries with high taxes, people also work less. People work a lot longer in countries with low taxes. If your marginal labor will be taxed at a higher amount, you will consider all your other elasticities before you commit to the extra hour of working. Maybe you would rather go fishing than have govt take 60% of what you would make if you worked that extra hour.
Social security represents such a tax. Govt borrows at a real rate of .86%. So, when you work an extra hour you know that 12.4% of your earnings will give you .86% on average. If you knew that it will get a higher return, then it represents a tax-cut. People will allocate labor more efficiently.
So, we're making assumptions about what most people will do.
I will tell you why people will work longer. Keeping wages constant, if the marginal output of labor increased your marginal wages/wealth you will increase the output of labor.
Ok. We're talking about welfare costs. Payroll taxes are a disincentive. Most people are less willing to work. They lower discretionary income. Or, so the theory, keeping wages constant, goes.:-) But, contributing to social insurance programs, though compulsory, shares risk associated with not working.
If your marginal labor will be taxed at a higher amount, you will consider all your other elasticities before you commit to the extra hour of working. Maybe you would rather go fishing than have govt take 60% of what you would make if you worked that extra hour.
You might choose to work overtime, take a second or third job, invest in additional education or training, in an attempt to raise your present or future discretionary income. Many people are willing (if they think about it at all) to accept the tax to achieve a gain. Others would prefer running a trot line.
And then, until recently, and maybe even now, there is the question of how much of a loss do workers regard the OASDHI tax to be? Until the media and the politicians went to work, there was some level of confidence that a worker connected the tax with some level of present or future benefit. That, as well, would affect labor supply.
Social security represents such a tax. Govt borrows at a real rate of .86%. So, when you work an extra hour you know that 12.4% of your earnings will give you .86% on average. If you knew that it will get a higher return, then it represents a tax-cut. People will allocate labor more efficiently.
Assuming labor is allocated less efficiently now.
First, a higher rate of return simply, or not so simply, requires new legislation: overhauling the Social Security program. As everyone knows, or should know, a social security pension is not a return on investment. Second, the payroll tax includes not only contributions to the pension program but a portion is allocated to survivor's and disability insurance. Seems to me, that in the absence of an OASDHI payroll tax, our aggregately rational workers' higher rate of return would be diminished by the cost of privately purchased survivor and disability insurance, assuming they are rational enough to delve into estate planning and income protection. Third, the higher rates of return generally involve higher risks, unless someone starts to sell insurance which provides a safety net. Social Security and its associative programs involve higher political risks. That in the long run stocks and other private investments have tended to increase in value does little to comfort the retired worker caught in the trough of a bust. Fourth, no one has tackled the challenge of convincing a young person they are not immortal and not guaranteed good health. Some of the younger ones will be wise and some will be stupid or unlucky. The stupid and the unlucky will starve or become dependent on government kindness. The wise will pay for private insurance programs at what ever happens to be the market rate.