More refection on taxing Social Security

Why are Social Security benefits taxed?

Government needed more revenue for both Social Security and Medicare. Policymakers rationalized (correctly) that beneficiaries did not pay for their benefits … employers and other taxpayers paid for most so it was not unreasonable to partially tax the SS benefits.


Where did the money go?

Think of it this way. If you have an employer pension, the benefit is fully taxable when you receive it except for that portion of the benefit, if any, that you contributed to the pension plan. The same holds true for Social Security. Many people find this unfair or at least don’t understand the logic, but that’s because they have been told incorrectly that they have paid for their benefit when nobody actually has.

Here is some factual information about taxing Social Security benefits.

From the Congressional Research Service, June 2020

“The Congressional Budget Office (CBO) estimated that 49% of Social Security beneficiaries were affected by the income taxation of Social Security benefits in tax year 2014. That share is expected to grow over time because the income thresholds used to determine the taxable share of benefitsarenotindexedforinflation orwagegrowth. SocialSecurityAdministration analysis projected that over 56% of Social Security beneficiary families will owe income tax on their Social Security benefits in 2050. Among those who owe income tax on their Social Security benefits, the tax liability increases with income.

“In 2019, the Social Security trust funds were credited with $36.5 billion in revenue from taxation of benefits, accounting for 3.4% of total income. The Medicare HI trust fund was credited with $23.8 billion in revenue from taxation of benefits, which equaled 7.4% of total income. In 2018, the Railroad Retirement system was credited with $255 million in revenue from taxation of Railroad Retirement Tier I benefits, representing about 1.9% of total income.

Under the intermediate assumptions of the 2020 Social Security Trustees Report, income taxes on benefits are projected to reach $98 billion in 2029, representing 6.1% of total income to the Social Security trust funds. Under the intermediate assumptions of the 2020 Medicare HI Trustees Report, income taxes on benefits are projected to be $68.8 billion in 2029, accounting for 13.3% of total income to the Medicare HI trust fund. The 2020 intermediate assumptions reflect the Board of Trustees’ understanding of Social Security and Medicare at the start of 2020; they do not include potential effects of the Coronavirus Disease 2019, or COVID-19.

6 comments

  1. What many people fail to realize is Social Security is not a retirement account system.
    It is a welfare program set up to ensure that no family will live in poverty after they can no longer work. It provides old age benefits, after age 62. It provides disability benefits if you can no longer work. It provides survivor benefits for family members that qualify, after you die. And it provides old age spousal benefits, after the primary beneficiary dies. What anyone pays into the Social Security system in FICA taxes or what their employers pay in FICA taxes, has nothing to do with what an individual / family will receive in benefits. It is time to stop trying to figure what we all paid in and are we getting back the taxes paid in over our lift time. The Social Security trustee’s have already figured that out for us. For those who make it to 62 and draw benefits for 10 years, they have in all likelihood received back everything that was paid in FICA taxes. I have done the math for myself and adjusted for 2018 dollars, I will have all FICA taxes paid back in 6.5 years. My brother died at age 46 so he received nothing for FICA taxes paid My dad died at 66, so did not get back much in the 11 months he received benefits. The FICA tax is just like any other tax, it is collected and used to pay benefits. Just like property tax funds schools and if you own property you pay it, even if you do not haver any children or any children that are still in school.

    From Wikipedia
    In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration.[1] The original Social Security Act was signed into law by Franklin D. Roosevelt in 1935,[2] and the current version of the Act, as amended,[3] encompasses several social welfare and social insurance programs.

    It is time to stop calling Social Security a retirement system, as many people continue to work while receiving benefits or survivors qualify for welfare benefits because of the death of a worker.

    Like

  2. Similarly, your contributions were made after tax, meaning that the the accumulation of value with respect to the portion you paid should also be tax-free (Roth). More importantly, those who end up paying Social Security taxes are disproportionately those who receive a benefit from the progressive formula (bend points, etc.) where their own contributions and earnings thereon represent a much higher percentage – a greater portion of the amount “returned”. So, the taxation of social security benefits should be $0, until the individual has received the equivalent amount in benefits equal to a calculated return of her/his contribution and associated earnings represented.

    Under that scenario, assuming I live to my normal life expectancy (adjusted for my less than perfect health), as I am 68 and still working and paying into the system, I’ll likely pay nary a $.10 on the benefits I receive. However, my spouse is likely to survive me, and she will end up paying taxes in this structure.

    Not gonna happen. So, no reason to discuss it. Simply, Congress feels they can do whatever they want to do to buy votes.

    Like

  3. Richard, if everyone’s SS benefits were paid by someone else, didn’t someone pay for those benefits and therefore perhaps I paid for my own? I’m not sure what motivates you to repeat this refrain. A cursory look at the amount contributed over an average earners working life verses the amount received in benefit, utilizing compound interest, just like we do with our personal retirement savings, suggests that the amount received annually is consistent with the 4% withdrawal rule, minus the benefit of ownership of the asset, which qualifies SS as a Ponzi Scheme which I was coerced to play. There’s little defense appropriate to suggest that my dollars did not contribute to my benefit other than the grave inequity of the program.

    Like

    1. Your dollars were spent long before you started collecting benefits. Let’s say you and friend had exact same earnings history. You are married and your friend is not. Who paid for your wife’s benefits active or survivor? What about the benefits paid to both a current and former spouse? Or the benefits paid to a family with a disabled person? There is no way to equate SS taxes to benefits. It’s just another tax using payroll rather than income as a base.

      Like

      1. I disagree. I know what I paid in taxes with respect to funding Social Security and Medicare. I can also identify what I have and will receive from Social Security and Medicare. The fact is that some of us know that it is all but impossible for us to recover the “investment” we made into the system (not into a specific account), once you adjust for taxes and investment earnings.

        For example, my income taxes funded a significant amount of Part B and Part D benefits others have received. I am not enrolled in Medicare Part B and Part D today – and am still paying those taxes to fund others benefits.

        However, my “investment” in the system designed by Congress is clear, unambiguous, and, I am 100% certain I will not ever in my lifetime, qualify for Part B and Part D benefits equal to or in excess of the taxes I paid, and will pay someday in the future (including, hopefully IRMAA, should I be so lucky).

        The fact that Congress took my contributions and invested them in government bonds or spent those dollars elsewhere doesn’t change the fact that some of us will get significantly greater amounts in benefits relative to the dedicated taxes we paid and the general taxes we paid, while others will receive significantly less than the taxes we (and our employers, adjusted for “foregone” investment earnings) paid.

        My father, for example, paid in from 1936 until he died at age 53 in 1969. He, himself, received nothing. My mom, because she was an employee of the state of Ohio, didn’t even qualify for a return of the contributions my Dad made let alone a return of the contributions she, herself made prior to becoming a State of Ohio employee in 1970 (because of the offset).

        Finally, what we are talking about is accounting for the contributions, earnings, benefits, we made/received, etc. We are not talking about investments in a specific account. As you correctly point out, many individuals, what I call the first group) think they paid the full cost of the benefits they received, that their contributions were what caused the benefits to be paid. We all know that is not true. We also know that many people (what I call the second group) clearly had to pay in much more than they will ever receive in order for the first group to be able to have / maintain that misunderstanding.

        Like

      2. Well, one thing is sure. I do not want to receive one penny in Medicare benefits. When I retired because part of my pension is non qualified, I had to write a check to Medicare for $16,000 based on the present value of my pension which I may never receive.

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s