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.
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.