We can’t control what others do and we can’t stop misfortune from striking. But we can control our own actions. Those who are financially prudent will most likely enjoy success, even if events don’t always go their way.
MY CONTENTION: ONE of the most egregious parts of the tax code is the stealth tax on Social Security benefits.
To be sure, if your income is low enough, your benefits won’t be taxed. But around 56% of retired Americans pay taxes on up to 85% of their Social Security benefits. And the number grows each year. Incomes rise, if only because of inflation-driven increases, and yet the thresholds for taxing benefits have never been adjusted for inflation or wage growth. Adding insult to injury, 11 states currently tax Social Security benefits.
Today, if you’re an individual filer with a combined income between $25,000 and $34,000, up to half of your Social Security benefit will be taxable on your federal tax return. If your combined income is above $34,000, up to 85% of your benefits may be taxed.
Meanwhile, if you’re married filing jointly and have a combined income of $32,000 to $44,000, up to half of your benefits will be taxable. If your combined income is above $44,000, up to 85% will be taxed. Combined income includes your adjusted gross income, municipal bond interest and half of your Social Security benefit. Who came up with that cockamamie definition of income?
When the tax on benefits was introduced in 1984, it only applied to 50% of benefits. Because of further tax hikes introduced in 1993, up to 85% of benefits can now be taxable. So, let me get this right: No tax was fair before 1984, taxing 50% was fair for the next decade and now 85% is justified. Makes total sense, right?
Apparently, ignoring inflation is also fair. The $25,000 threshold for individuals and $32,000 for joint filers would rise to $73,000 and $93,200, respectively, if they were adjusted for the inflation since 1984, according to a USA Today article. Result: A tax, which once hit just 10% of retirees, now affects more than half of seniors. When you consider that other tax items—such as federal tax brackets, contributions to retirement accounts and the standard deduction—are adjusted annually, it all seems ridiculous.
Currently, there are bills in Congress called You Earned it, You Keep It and The Senior Citizens Tax Elimination Act, written by a Democrat and a Republican,respectively. Both would remove Social Security benefits from the calculation of gross earnings for income tax purposes.
But don’t expect either bill to be acted upon, given Social Security’s looming funding crisis. Remember, we’re looking at potential Social Security cuts of 25% in the early 2030s if Congress doesn’t take action. Overhauling Social Security would require bipartisan support. With a divided Congress, there seems little hope.
Meanwhile, seniors are getting squeezed by inflation. Yes, Social Security’s cost-of-living adjustment (COLA) for 2023 was the highest since 1981. Problem is, there’s a weakness in the COLA, which is measured by a version of the Consumer Price Index known as CPI-W. It doesn’t accurately reflect the different spending habits of seniors. A study by The Senior Citizens League, a nonpartisan advocacy group, found sharp cost increases for seniors since early 2000:
Out-of-pocket prescription drug costs climbed an average 311%, from $1,102 to $4,524.
Out-of-pocket dental care costs rose an average 275%, from $286 to $1,073.
Monthly Medicare Part B premiums increased 262%, from $45.50 to $164.90.
The Senior Citizens League found that the goods and services bought by the typical retiree rose 141% over this period, while Social Security benefits climbed just 78%. And don’t expect relief anytime soon. Social Security’s COLA adjustment for 2024 won’t be anywhere near this year’s 8.7%. In fact, the COLA for 2024 could be below 3%.
Inflation hit a 40-year high in June 2022, but it’s now easing in some categories. Still, groceries are continuing to see rapid price increases. Middle- and lower-income retirees—whose budgets are already stretched—will be hit hard, spending more on necessities while losing more of their Social Security benefits to taxes. The bottom line: Even without actual cuts, benefits are shrinking.
Here is my my view of they situation, what’s yours?
Majorie, your views expressed here reflect the way many of us seniors feel, probably most. Even though I can speak as a fully qualified senior (seasoned) I disagree with this general point of view.
Generally speaking we seniors had forty or more years to prepare for retirement including knowing that inflation would be a part of our lives.
In 2023 federal spending on Social Security and Medicare alone equal 33% of the budget. Six times more than we spend on education, training, employment and social services. How can we seniors claim to be entitled to more?
I don’t like paying taxes and I sure don’t like IRMAA, but paying income tax on up to 85% of our SS benefits is based on the fact that overall we seniors fund only about 15% of total benefits we receive as a group.
I know as far as I go I long ago collected twice what I and my employer paid in payroll taxes over fifty years. We may have earned our benefits through years of working and meeting the requirements of the law, but we sure didn’t pay for them.
Income taxes on SS benefits send $49 billion a year to the SS trust and $33 billion to Medicare trust. Without that, taxes would be higher or the trusts in worse shape than they currently are.
We Americans are a strange lot, we complain about taxes all our lives and try to avoid or defer them – 401l, Roth account for example and then when we reach our golden years, we as a group seem to want more to which we are “entitled.”
The way I see it, we had our shot and it is unfair for we older Americans to demand more which results in taking from younger Americans, young families struggle as much as and perhaps more than seniors. Younger Americans are now paying for our benefits and if Congress ever fixes SS and Medicare – which they will – workers will likely pay much more in taxes.
I am not a great fan of the SSL because I think they mislead and use flawed surveys. However, the CPI-W may not be perfect, but no measure will be because each of us has their own CPI based on our spending patterns. For example, if a senior is renting their rent may increase, but if they own a home only taxes may increase, but even that is tenuous. In NJ a senior citizen couple earning up to $190,000 can have all property taxes frozen so they do not pay increases, but someone else does. Other states have similar programs.
In any case, using the CPI-E is not a solution either as in some years past it resulted in a lower COLA or very minimal difference.
My bottom line is that we are all on this journey together, each age group has its needs an desires along the way and no one group has the right to take from the other thereby making their journey more difficult.
Thank you for being one of the few people who point out that recipients usually receive far more than they paid into the system.
Somthing to possibly write about: traditional IRA contribution amounts have not increased with inflation each year. Take a look at what could be contributed in 1990 versus today. Employees contributing to 401Ks and SEPs, etc. have benefitted from inflation increases to contribution levels but someone who doesn’t have a plan at work and has to use a traditional IRA has not benefitted. I’m 55. My husband hasn’t had a workplace employer since 2008 and didn’t for many years in the 1990’s. I’ve never understood why IRA contribution amounts for someone without access to a workplace plan can’t be the same as 401k contribution limits. I can save $25,000 tax deferred (+$5,000 if age 50+). He can’t save any tax deferred at our income level because I have a workplace plan. Even if he could save, the IRA limit is $6,500 (+$1,000 if age 50+). It is hard to save for retirement (in a tax deferred way) with that small amount. Why can’t he save in a tax deferred IRA but a couple who both have a 401K at work can? This affects many who work for small businesses, stay at home spouses, etc.
Here is something else to think about as a writing topic: you point out that many SS recipients receive more than they paid in. I see you make the statement that taxes can be raised to maintain current benefit payments. Why do you make the proposition that taxes will have to increase to maintain levels of payments RATHER THAN decreasing payments in line with tax collection? One example, why not look at recipients who have received as much as they paid in (plus some rate of return), or some other measure, and consider that it might be “fair” for THOSE recipients to see payments reduced AS OPPOSED to raising taxes on current workers. From 50 thousand feet I continue to see an older generation that expects to benefit/maintain it’s standard of living on the backs of young people.
Both sides have good reasons for their case. My only comment would be that over time, inflation shrinks the dollar such that we think a person hitting the 25k annual income level should be subject to taxation. That income level is no longer a viable lifestyle, for workers or beneficiaries. So my suggestion would be to raise the lower bound at least. At least on a one time basis and revisit it as needed. The 25k and 32k levels seemed more respectable in the now distant past.
I’ve always been hit with the “tax torpedo” as it was called years ago but if it were a factor to me now it would be an immediate concern.
QUINNSCOMMENTARY 
Thank you for being one of the few people who point out that recipients usually receive far more than they paid into the system.
Somthing to possibly write about: traditional IRA contribution amounts have not increased with inflation each year. Take a look at what could be contributed in 1990 versus today. Employees contributing to 401Ks and SEPs, etc. have benefitted from inflation increases to contribution levels but someone who doesn’t have a plan at work and has to use a traditional IRA has not benefitted. I’m 55. My husband hasn’t had a workplace employer since 2008 and didn’t for many years in the 1990’s. I’ve never understood why IRA contribution amounts for someone without access to a workplace plan can’t be the same as 401k contribution limits. I can save $25,000 tax deferred (+$5,000 if age 50+). He can’t save any tax deferred at our income level because I have a workplace plan. Even if he could save, the IRA limit is $6,500 (+$1,000 if age 50+). It is hard to save for retirement (in a tax deferred way) with that small amount. Why can’t he save in a tax deferred IRA but a couple who both have a 401K at work can? This affects many who work for small businesses, stay at home spouses, etc.
Here is something else to think about as a writing topic: you point out that many SS recipients receive more than they paid in. I see you make the statement that taxes can be raised to maintain current benefit payments. Why do you make the proposition that taxes will have to increase to maintain levels of payments RATHER THAN decreasing payments in line with tax collection? One example, why not look at recipients who have received as much as they paid in (plus some rate of return), or some other measure, and consider that it might be “fair” for THOSE recipients to see payments reduced AS OPPOSED to raising taxes on current workers. From 50 thousand feet I continue to see an older generation that expects to benefit/maintain it’s standard of living on the backs of young people.
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Both sides have good reasons for their case. My only comment would be that over time, inflation shrinks the dollar such that we think a person hitting the 25k annual income level should be subject to taxation. That income level is no longer a viable lifestyle, for workers or beneficiaries. So my suggestion would be to raise the lower bound at least. At least on a one time basis and revisit it as needed. The 25k and 32k levels seemed more respectable in the now distant past.
I’ve always been hit with the “tax torpedo” as it was called years ago but if it were a factor to me now it would be an immediate concern.
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