You betcha, but also necessary – unless you have a better idea to generate income for the Social Security and Medicare trusts.
You and I did not pay for our Social Security benefits. In the aggregate all beneficiaries have paid for about 15% of benefits received. I did not contribute toward my pension so it’s fully taxable. If I had contributed on an after-tax basis that portion would not be taxed.
I looked at the total I paid in FICA taxes as well as what my employers paid from 1959 until I retired in 2010. We received in SS benefits, including my wife’s benefit on my earnings, all I and my employers paid in taxes within about six years of starting Social Security payments.
As with most government programs there is much confusion. Some people think they will pay 50% of their benefits in taxes. Of course the reality is that while a portion of the SS benefit may be taxable income, what is actually paid in taxes depends on a persons overall tax situation and income tax bracket.
Critics note that the income point at which SS becomes taxable is not indexed for inflation. That’s true, but by design presumably so revenue increases over the years.
The taxability of SS benefits can be minimized if retirement income is virtually all from Roth accounts which does not count in the Modified Adjusted Gross Income calculation – now, in my opinion that is unfair. Income in retirement is income after all.
The bottom line is the taxability of up to 85% of a Social Security payment is a important funding source for both the SS and Medicare trusts. The SS trust receives $50 billion a year from the taxation of benefits and the Medicare trust $35 billon a year.
Both the Social Security and Medicare trusts need additional revenue which will require higher taxes or benefit changes. Eliminating the taxability of SS benefits means more of the needed revenue must come from working Americans and future retirees.
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You make a mighty fine spokesperson for the IRS and the tax grab for SS benefits. However I don’t buy it. A few reasons: The grab is not a major income producer for the SSA, maybe 3.75% of the overall take. The grab is not inflation adjusted, an amount of $35000 in 1950 is $84000 now, that means much lower income people are now being taxed. Kind of a reverse Robin Hood. The formula for the income counted includes otherwise tax exempt interest and RMD withdrawals from retirement accounts that are from previous savings and not current earnings. The IRS turns the amounts collected over to SSA when it could just as easily be lumped into the current year Federal budget since it is an income tax exercise.
So why jump through hoops to justify a tax grab? Social Security will sink or swim based on factors far greater than squeezing some lower middle class retirees.
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Tax grab? You make it sound like taxes are unnecessary. Keep in mind that while 50% of the SS benefit may be taxable, the taxes actually paid, if any, especially for the lower middle class are quite small. RMD withdrawals never paid taxes on any of the distribution and its income. The fix for SS will – should – come from – several modest changes combined. Your inflation calculation is way off by the way.
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Thanks for the heads up on the inflation error. It is 426000 not my original amount. Bolsters my point even more. Yes I call it a tax grab. Taxes being a necessity doesn’t justify every tax on everything. Modest changes aren’t going to keep SS afloat, if they would the changes would be put in place now. My use of the RMD was for purposes of the value of a withdrawal being worth less over time due to inflation.
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