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AUTHOR: R Quinn on 1/27/2025
It would be nice, quite a windfall.
However, we didn’t pay for our benefits. In the aggregate, beneficiaries pay for about 15% of all benefits received, hence maximum 85% of benefits being taxable. I checked my records a found that within six years of starting, I collected benefits (including spousal benefit) equal to all the taxes I and employers paid since 1959.
The law says the benefits are taxable income, but given the standard deduction, a lower income retiree may pay very little or no actual taxes on the benefits received.
The income taxes paid go to the Social Security and Medicare A trusts, not general revenue. Both trusts are underfunded and being depleted in a few years.
How do the programs make up the lost tax revenue? We have yet to hear of a plan to make either Social Security or Medicare sustainable.
So, is it fair, prudent or necessary to make Social Security benefits income tax free?
I have asked many people and overwhelmingly the answer is yes, benefits should be tax free – while they also demonstrated a total lack of information or understanding of the issue, with many still believing Congress stole the trust funds or they could have done better investing on their own without paying SS payroll taxes. Oh my. 😱
QUINNSCOMMENTARY 
wrong, workers, as a group, paid 100% of the cost through foregone wages and investment earnings, plus their actual contributions. Many paid far in excess of their benefits, given the social aspects of the program.If not, who paid for them – the French, Mexico?
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That is theoretical – foregone wages, investment earnings. In practice workers could not or would not replace the protections offered by SS. Many paid far in excess of their benefits? How many? How many people die a month after they retire?
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you misunderstand me. All the benefits paid by SS to date came from the trust fund. All or almost all those monies came from FICA taxes (contributions) and trust earnings on those contributions. So, as I said, workers as a group paid all the costs, as the company contributions are clearly foregone wages, plus the workers own contributions and the trust fund’s earnings.
the money didn’t come from elsewhere.
for Medicare, it is a little different – the monies came from FICA-MED contributions for most of Part A (hospital), plus earnings on those monies, but for Part B & D, only general revenues, mostly funded with income taxes.
since nearly half of all households do not pay income taxes, coupled with the progressive formula for Social Security, higher income workers are clearly funding amounts far in excess of their SS and Medicare benefits.
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Since we have already paid income tax on the money “contributed” to the fund, this after-tax contribution is similar to a ROTH account. Why not treat future distributions / receipts similarly?
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But where to we get the $50 million to replace lost revenue?
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If the taxation of benefits is not consistent, and therefore wrong in my opinion, then it should be corrected or fixed. My big picture solution is to completely overhaul the tax system and simplify.
Where to find the $50 billion “lost revenue”?
First, I’m suspicious of that figure, and I trust very little of what the bureaucrats say.
Second, isn’t the federal annual outlays over $6 trillion? It should be easy.
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Tax the benefit once it exceeds the amount paid in by worker and employer.
Of course the money invested in a solid balanced fund like Wellington or Puritan would far exceed the value of your SS at retirement age. Purchasing an Annuity with 1/3 rd of your money would build in a guarantee and a withdrawal plan like SS now uses could pay monthly benefits.
I believe Australia revamped their retirement system years ago and included benefits similar to ours like survivor and disability benefits to go along with a healthy private system.
The Galveston Plan has worked for decades and has rolled through bear markets without a glitch.
It will take a crisis to change the system but buying votes by Trump with a no tax plan sounds as irresponsible as buying votes by shifting student debt to general debt.
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You make a case for both taxing all benefits or none or some amount in between. You say we didn’t pay for our benefits, a true statement that justifies taxing 100% of the benefits or since it is a benefit for the retired (I exclude disability benefits in this discussion) it can justify taxing none. How much you get back over the benefit received is immaterial.
The claim that any taxes extracted from retirees goes back into the pot is not an excuse to tax the benefits. During the life of the Social Security program thus far, we have gone from no taxation to a taxation on only the very higher income recipients to a tax that is digging down into the middle class and will eventually dig down lower due to inflation. So we’ve taxed none, a few or greater numbers of retirees over the years.
There are as many thoughts on Social Security as there are people and that won’t change but a well thought out policy going forward could help.
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They should have indexed the taxable amount to inflation. Totally different conversation now.
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