Image: 401k © Don Farrall, Photodisc, Getty Images

Before politicians can fix Social Security, they need to ensure that older Americans feel more secure about their financial future thanks to the fruits of their own labor instead of any form of entitlement.

In September, a fascinating study done by economists affiliated with the University of Michigan Retirement Research Center may have outlined a way to do that.

The study was nonpartisan and apolitical, which is precisely why it makes so much sense that neither the Democrats nor the Republicans are likely to pick up this particular ball and run with it. But for those who are staring retirement in the face, the research has some interesting implications, even if Congress never uses it as a blueprint for doing the right thing.

Incentives now reward retiring

The basic concept that economists John Laitner and Dan Silverman set out to study was whether heightened longevity might lead to longer, more-productive work careers. While people are living longer -- and are generally seen as being capable of working longer -- "most people have opted to take most of that extra time they have as additional retirement rather than additional work," Laitner said.

With people living longer, it's harder for their retirement savings to last. Moreover, they're more vulnerable to swings in the market and economy; they're also potentially more dependent on entitlements and government support.

"Our worry was that maybe the tax system -- which taxes time spent at work but not time spent at leisure -- is biasing them toward choosing retirement for more than a proper share of that extra time," Laitner said in a recent interview.

Mind you, there is definitely a segment of the older population that wants to work but has been forced or "incentivized" out of jobs by employers looking to trim payroll and willing to rely on younger, less-experienced workers. It's not necessarily easy for a senior worker who wants to stay employed to keep a job.

But Laitner and Silverman, whose research was published in the Journal of Public Economics, simply wanted to know if there was some incentive that would convince senior workers to lengthen the working percentage of their lives in keeping with their greater longevity.

The incentive they came up with is compelling: a 10% pay raise.

Putting a little more in your wallet

For the study, that boost didn't come in the form of a government subsidy or an employer-borne handout. The idea was simply to eliminate Social Security payroll taxes starting when workers are 55 years old. As a result, take-home pay would jump 10.6%, and the average worker would stay on the job 1.5 years longer. During that time, older workers would continue paying income taxes; their only break would be on the payroll tariff.

The change would be paid for by raising payroll taxes slightly for workers who are younger and nowhere near retirement.

"Our idea was that we would have the Social Security system become vested at some late age -- say, 55 -- and prior to that we'd have the payroll tax be a little higher than it is now, but after 55 you'd be done, and the thing would be vested and you would not have to pay the payroll tax anymore," Laitner said.

"Our thought was you'd be paying a little higher tax early in your career when retirement is not an option," he added, "but we take the tax off late in your career when you are trying to decide when to retire."

Call it a targeted tax cut, aimed at convincing people to overcome biases against working longer.

"It's kind of a win-win situation," Laitner said. "The people would have an option where they could work longer if they choose to do so and get a better deal out of the system. . . . (I)f people work longer they would have more resources for retirement, but the federal government would be collecting income taxes for those extra years."

Another potential win is that not only would workers who are behind in amassing a retirement nest egg want to work longer, but they would also have more take-home pay to get their savings tanks filled before leaving the workforce.

The big winners in this would be people who want to work longer, as they would get to spend more time on the job without the payroll tax; the theoretical losers would be people who want to retire as early as possible, who don't really benefit from the years without a payroll tax.

If the point of seemingly every "reform" policy is to encourage additional work by rewarding it, this would qualify as a big step in the right direction.

That said, it's not happening any time soon, and most workers today will face their retirement decision without this kind of targeted tax action.

Still, the underlying question -- "What would make it worthwhile for me to work longer?" -- is something every worker should consider if he or she has the choice to continue employment. The decision should be examined from both a savings and income perspective, as well as how it best serves personal and financial needs.

Yes, additional incentives would be good, but if you really look at what your savings and income can support and worry that your future may be tight, that alone should be plenty of incentive to keep working toward a comfortable retirement, rather than hoping for the best.

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