Over the years there have been many changes to Social Security, some to add benefits, some to shore up finances, none sufficient by the way to keep the trust sustainable.
One of those changes was taxing Social Security benefits. In many Americans mind those taxes are unfair. After all, they paid for their benefits, why tax them? Eh, not so much.
The notion that the SS payroll tax is more personal and thus so allocated for our benefit is, well, false. It’s just a tax like any other and has no relationship to the benefits we collect.
In theory at least beneficiaries are not taxed on the value of their contributions, but on the benefit funded by their employers (just like a pension) by other taxpayers and by the interest paid on trust treasury bonds.
As a leading member of the Greenspan commission on Social Security in 1982-83, Ball had an opportunity to promote this idea.[6] The subsequent Social Security Amendments of 1983 provided that up to 50 percent of benefits would be taxable for beneficiaries with incomes above certain levels. A decade later, the Omnibus Budget Reconciliation Act of 1993 provided for the taxation of up to 85 percent of benefits for individuals with modified AGI above somewhat higher thresholds. The provision has since remained unchanged.
Lawmakers chose the 85-percent figure because actuaries estimated that no Social Security beneficiary had paid (through withholding from his or her paychecks) for more than 15 percent of his or her own benefits. The rest represents employer contributions and imputed return on both worker and employer contributions. Most beneficiaries contribute much less than 15 percent of their own benefits, so the 85-percent limit was considered generous.[7] In addition, the income thresholds shield low-income beneficiaries from tax. 🔴
Source: Taxing Social Security Benefits Is Sound Policy | Center on Budget and Policy Priorities
🔴The portion of your benefits subject to taxation varies with income level. You’ll be taxed on:
- up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.
- up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple).
- Nobody pays income tax on more than 85% of the SS benefit.
QUINNSCOMMENTARY 
Has anyone provided any rationale as to why the thresholds are NOT indexed to an inflation index?
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Politicians intentionally sold the American people a “pig in a poke”! Back in 1983 [under Reagan] when politicians passed the first law to tax SS benefits as income, the arbitrary $25.000/$34,000 income thresholds they put in the bill were considered to be high. The average person may not have been aware, but those politicians knew darn well that inflation would eventually force seniors with low incomes to pay that income tax. And when the income tax on SS was increased in 1993 [under Clinton] to 85% of a second set of arbitrary incomes, politicians had the opportunity to increase the original 1983 $25,000/$34,000 arbitrary income thresholds. But not only did politicians NOT increase the first arbitrary income thresholds, they built new taxes upon them! A pox on both their houses!!
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During the Great Depression, his “root hog or die” mentality is why Hoover lost his second term and people overwhelmingly voted in FDR [who created Social Security!]
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So, the 85% is based on someone’s guesstimate (27 years ago) that the percentage represents the “income” from employer contributions and imputed income on both the employee and employer contributions (as if this is receipt of monies that were never taxed)?
Of course, that would be faulty reasoning – at least two ways:
First, in terms of the income on employee contributions, the worker’s FICA contribution is after-tax. So, if this were a contribution to a life insurance policy, a long term disability policy or a Roth IRA or Roth 401(k), the “earnings” would not be subject to taxation.
Second, in terms of the income on employee and employer contributions, those monies are actually a refund of income and other taxes you and I paid (monies that did not qualify for tax favored treatment when paid).
So, the suggestion that this is somehow “fair”, that it should be taxed as “income”, is typical beltway banditry.
Finally, here are two other considerations:
First, the progressive nature of the benefit formula means that those with higher incomes should have a much lower percentage (not 85%) when determining imputed income and they were funding a much larger percentage of their own benefit, and
The progressive income tax system, with higher marginal income tax rates for higher income individuals, means that the social security benefit is taxed at an individual’s marginal tax rate (federal and some states).
So the methods used and allocations reconfirm, over and over and over, that the system, taken as a whole, disproportionately favors lower income individuals – while employed and after retirement.
That is, people can complain all they want about how regressive FICA and FICA-Med taxes are (they are actually proportional to FICA wages). However, when you factor in the benefits they fund, as I have noted numerous times here in the past, this is a highly progressive system.
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How is this that different from a pension plan where any after-tax employer contrib is not taxed but employer contributions are? Clearly the 15% is a large average not applicable to every worker.
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Everything you stated about taxing social security is true. I have never done enough research or tried to calculate funding of, or the taxing of the earnings that I received or portions thereof, that should have been taxable in the years that my employer and myself paid the tax.
My issue is that it seems so counterintuitive to be taxing social security benefits and then handing out COLA’s because people can’t live on their benefit and need more money. It just feels wrong and feels like it is nothing more than money grab by the same politicians promising more.
Why not just change the benefit to reflect already withholding the taxes? The answer is because then the benefit will look “smaller” and politicians want it to seem that they gave you more money.
In money matters, if something doesn’t feel right or it is too good to be true, run. I am not saying that any of this is wrong or illegal or that this money was taxed. I am just saying that taxing the money that the government gives you has never felt right to me. Why give you money when the government is going to tax you to get it back? And yes I know that the government will pay me more benefits then what I actually contributed. It still doesn’t make me feel good. It is not wrong to tax, but the perception feels so wrong to me. Groups with agendas just make it this “perception” worse.
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Taxing SS is not a money grab, as those taxes are sent to the SS trust fund to pay SS benefits. $36 Billion in income taxes were paid in 2019 on SS. benefits. About 56 percent of families pay some income tax on part of their benefits. Since the income where you will owe tax on SS benefits is not adjusted for inflation, as incomes rise more families will have to pay more in income tax on some of their SS benefits. This needs to be fixed, but I am not sure congress or any president will fix it. I am 65 and pay no tax on mine and my wife’s SS benefit, but by the time I am 75 the tax on our SS benefit will equal about 60% of the COLA ,if it averages just 2% over the next 10 years, = $229 in taxes owed on $45,769 total military pension and SS income in 2031. Not much, but with the rising Medicare premiums, COLAs after age 65 will not be helping me fight inflation, that is for sure. The Medicare part B premium increase for 2021, takes 50% of our SS COLA and that is only because Congress has limited the Medicare increase, because of COVID. For once I would like to see one of our corrupt political class, try and live on less than $50,000 per year.
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