Cutting the Retiree Social Security Tax
This does not make sense.
Between Fund payouts and Social Security, we were well below $100,000. After deductions and expenses (mortgage, property tax, donations, etc.) our income taxes were very small. We set a side 7% of our SS for taxes and we had plenty left over. We are not the poorest and definitely not the richest. If we follow Trumps suggestion, we will be favoring the very rich getting Social Security. The ones who can afford to pay.
Trump’s Tax-Cut Proposal Shakes Up Social Security Debate – WSJ
Donald Trump’s plan to repeal income taxes on Social Security benefits would eliminate an unpopular levy, make it easier for older people to keep working, and leave a big hole in the program’s finances.
At $1.5 trillion over a decade, Trump’s tax cut for Social Security recipients is one of the former president’s largest new policies as he seeks to return to the White House. It is smaller than extending expiring tax cuts but bigger than ending taxes on tips or lowering corporate taxes for domestic manufacturers.
Trump’s proposal has revived a dormant debate over taxing Social Security benefits when they are paid out. His plan is unlikely to pass Congress unscathed if he wins this fall, but lawmakers will have to examine the program’s finances by the early 2030s. Beyond seeking ways to extend Social Security’s solvency, they might look to trim the tax on benefits.
The income tax on benefits hit 50% of Social Security recipients in 2023, according to the Social Security Administration, up from 10% when Congress created the tax in 1983. Many retirees are surprised when they learn about the tax liability, and surveys show the Trump proposal has touched a nerve.
In a recent Wall Street Journal poll, 64% of respondents said they strongly favored eliminating taxes on Social Security benefits, with another 19% somewhat favoring the policy and 10% opposed. When asked whether they backed that change even if it increased the national debt, the share of those indicating support dropped to 41% and 26%, still leaving a significant majority in favor.
Michael Feeney, 68, of Arlee, Mont., said his and his wife’s Social Security benefits have been significantly reduced by surcharges they pay on Medicare premiums, which are deducted from benefits. Because Montana is one of a handful of states that tax at least some Social Security income, the couple face a tax rate of about 30% on benefits, said Feeney, who said Social Security comprises one-third of their retirement income.
The former executive at a life-sciences company said he has concerns about Trump’s proposal, including how the government would make up the lost tax revenue. But, he said, the policy change would let him reduce withdrawals from savings and help alleviate his anxiety over inflation.
A bill supported by most House Democrats would reduce, but not repeal, the tax while expanding benefits. The bill would replace the lost revenue and then some by imposing taxes on wages and investment income above $400,000. It would be a stark change from today’s Social Security payroll tax. The tax applies only to wages and self-employment income and stops at $168,600.
“We do something he doesn’t,” Rep. John Larson (D., Conn.), the Democratic bill’s chief author, said of Trump. “We pay for it.”
Congress began taxing Social Security benefits during the last major legislation that put the program on a solid long-term footing. Since that bipartisan compromise, ideas to shore up the program have gone nowhere. In about a decade, Social Security is projected to lack enough money to pay all of its obligations. This triggers an automatic benefit cut unless lawmakers act.
Income taxes on benefits now make up about 4% of Social Security’s revenue. Repealing the tax would hasten the day when the program can’t pay full benefits. Congress raised the tax in 1993 and directed that money to Medicare. Lawmakers intentionally set income thresholds for the tax without inflation adjustments, and it affects more people over time. Beneficiaries who pay the tax generally have wage or investment income beyond Social Security.
Nancy Altman . . .
“From the beginning, it’s not been well understood and was very unpopular. Nancy was a staff member for the 1983 commission that developed the plan. Now she is the president of the advocacy group Social Security Works.
Social Security recipients must calculate their income, adding in half of their benefits. If the total income exceeds $25,000 ($32,000 for married couples filing jointly), up to half of benefits are taxed. If it exceeds $34,000 ($44,000 for married couples), up to 85% of benefits are taxed. The system can create high marginal tax rates for working Social Security recipients. They simultaneously face regular taxes and taxes on more of their benefits as income goes up.
If recipients could keep more of each dollar they earn, some might return to work. Or they may work longer than they had planned, or work more hours. Alternately, the tax cut could also accelerate retirements. Retirees would get larger after-tax benefits and have less need for additional money.
“More so for the elderly than for any other population, people can be very, very different. Some people are working because they could never retire. They love their job,” said Steven Haider, an economist at Michigan State University who studies aging. “Other people are working because they’re having a hard time making ends meet.”
Trump’s proposal has spurred experts to consider more-efficient ways to have similar effects on the labor force.
Kyle Pomerleau of the conservative-leaning American Enterprise Institute. One option would be to include benefits in income from the first dollar and raise the standard deduction. That would prevent high marginal tax rates on working beneficiaries.
“You don’t need to hemorrhage $1.5 trillion in order to get the labor supply effects that some proponents want,” Pomerleau said.
Another option would lower payroll taxes for people who already have the maximum 35 work years to get full benefits, said Gopi Shah Goda, an economist at the Stanford Institute for Economic Policy Research. That, she said, would provide a more-targeted incentive for retirees to work.
Eric Beckman, a 71-year-old retired engineer in East Marlborough Township, Pa., said Trump’s proposal would be “good for the country,” since it would boost incomes of middle-income retirees like himself, though he worries about the federal government’s finances.
The tax cut would benefit 16% of all households, according to the Tax Policy Center, providing an average boost of $3,400. That would pump money into the economy and leave an equal-size gap in Social Security’s finances.
Nancy Altman . . .
Trump “gets the politics, and he understands how popular taxation of benefits is. So he’s thrown it out there. But again, without addressing the underlying shortfall, it just deepens the shortfall.”
Well after all terminal short-termism is the American Way; although the real question is what do the bankers want because that is what we will get. Witness The Treaty of Versailles and the 1944 Bretton Woods Conference agreement on FOREX reserves. We are still paying off the bankers’ mortgage on our ethics and morality for those. If this time was no different in 2008 then why should it be any different now?
IOW, this is to say that Trump is not just a tragically positioned sociopath, but also a dire exclamation on the long arc of US history. However, he is hardly the first US elite to hide his poison in the cake that he bakes for the common man.
Being educated on this right here, I do think it should be reformed, but not necessarily by eliminating it. Right now the collected funds go to social security exclusively. That being the case, lifetime earnings for benefit calculations should be updated to include the amount on which tax is levied. Imagine you get $40k benefit and have income that maxs you to 85%. To keep it simple, imagine your marginal income tax is twice the full SS rate. You should get credit for 170% of $40K ($68K) in additional lifetime earnings because you are contributing to SS just like you had $68K of SS taxable wages. Or the funds should just go to general revenue like all other income tax.
Or apply only the SS tax rate to the taxable part of the SS benefit.
Sigh . . .
If trump is proposing income taxes on Social Security, why would he do such? It damn sure not for what he would call the schmucks. Those are the low-income citizens in Social Security. The lowest withholding SS deduction for taxes from your Social Security is 7%. You can not do two or three percent. Why is such?
Because you are not going to pay income tax on your Social Security due to the deductions. If you are at the lower end of income, this is a fact. So any plan Trump offers up for no tax on Social Security will do “NOTHING” for them and that is millions of SS recipients. His plan will benefit the upper income brackets collecting Social Security.
I am (we are) on Social Security. WE worked until we were seventy which many people can not do. They should lower the age to collect Social Security to 65 again. There are many people who do physical labor or are stricken with physical issues or health issues who will not get to 66 or 67 and must take it earlier because they can no longer work. Most are lower income and Social Security is no gold mine for them. This was misdirected purposely and punishes low-income people while high income people do not give a damn if it comes later in life. They already have guaranteed income though 401ks or other retirement plans.
We have a house complete with a mortgage. I am an USMC vet who qualified for a 2.6% mortgage. We put a minimum down to secure this home. ~ fifty percent of our mortgage is interest and tax deductible. We pay property tax also, which is deductible.
We itemize. Most or all of what we withhold for taxes, we get back. We are not a six-digit household. Neither are we at the lower end. My federal taxes are miniscule. I suspect I am part of the majority. The minority at the upper income end would benefit significantly from no-tax Social Security. This especially if they max out SS retirement payments from high SS withholding.
You starting to get the picture? No Federal Income Tax Social Security benefits the upper income bracket, which Trump wants to do, and DOES NOTHING, ZIP, etc. for the lower income Social Security recipients. This is a standard Trump ploy and it is BS.
Bill,
Of course you are correct, but that rarely seems to matter when it comes to fiscal policy or even foreign policy if it also includes fiscal policy.
rc:
That is a different issue. The issue now is to accurate in presentation. If it peaks my interest at another time, I may tackle it. I have a lot on my plate right now involving Angry Bear.
Bill,
It seems to me that Bruce and Dale nailed the presentation correctly a very long time ago and here we still are. The orange-O-Tang is just adding insult to injury. That he is somehow construed to represent the interests of workers instead of investors is simply mind-numbing.
Ron:
REpubs could shut the orange one down. Except they won’t. They are in a circular array.
No SS income should not be taxed.
SS is a failed insurance program because its portfolio is filled with unperforming war bonds, that burdened the civilian economy.
Cut the war machine.
“Donald Trump’s plan to repeal income taxes on Social Security benefits would . . . leave a big hole in the program’s finances.”
There’s your answer. Republicans cut taxes in order to increase the deficit, so then they can turn around and demand program cuts. The goal here is to punch a big hole in SS, so they can justify cuts.
Of course, SS has zero to do with the general fund. It is funded separately, using special treasuries. Anyone who thinks SS funds wars doesn’t know how the federal budget works. I would love to see the defense budget slashed, but I know enough to know that SS has nothing at all to do with it.
Joel,
I believe that Paddy thinks that we would not run fiscal deficits if we did not fund the war machine which he does without realizing the extent to which fiscal deficits fund trade deficits and Triffin’s dilemma. Essentially financialization requires a steady flow of public debt bonds for growing financial reserve safe assets which in turn allows billionaires to profit from trade deficits and as it extends the general downwards slope of labor real wages.
@rc,
I don’t know. You might be right about what paddy “thinks.” What I know is that SS is not “war bonds,” and that SS does not, nor has it ever, paid for the US military.
At the end of the day, if Republicans want this bloated military, they should raise the taxes to pay for it.
@Joel,
US Treasury Bills borrow to fund overall general fund deficits, so if and only if the war machine is the cause of general fund deficits then US Treasury Bills fund the war machine. OTOH, if funding Triffin’s Dilemma is the cause of US general fund deficits then a lot of people would do well to understand Keynesian economics even more than Robert Triffin’s global monetary system theory. The SS connection linked below:
https://www.cbpp.org/research/social-security/understanding-the-social-security-trust-funds-0
Policy Basics: Understanding the Social Security Trust Funds
Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. The trust funds are invested in Treasury securities that are just as sound as all other U.S. government securities, held by investors around the globe and regarded as being among the world’s safest investments. Starting in 2021, Social Security began drawing down trust fund reserves to help pay for benefits. Although Social Security has a long-term financial shortfall that must be closed, the program’s combined trust funds will not be depleted until around 2035, which gives policymakers time to develop a carefully crafted financing plan.
Updated
July 24, 2024
How Do the Trust Funds Work?
Social Security’s financial operations are handled through two federal trust funds: the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. Although legally distinct, they are often referred to collectively as “the Social Security trust fund.” All of Social Security’s payroll taxes and other earmarked income are deposited in the trust funds, and all of Social Security’s benefits and administrative expenses are paid from the trust funds.
Social Security is largely a “pay as you go” program, meaning today’s benefits are funded primarily by the payroll taxes collected from today’s workers. For over three decades, however, Social Security collected more in payroll taxes and other income than it paid in benefits and other expenses, and the Treasury invested the surplus in interest-bearing Treasury securities, ultimately reaching a total of $2.9 trillion in trust fund reserves. In 2021 Social Security began redeeming those reserves to help pay benefits. Payroll taxes from current workers will continue to pay for the bulk of benefits. The trust fund reserves will make up the difference between income and costs until the reserves are depleted. At that point, Social Security’s income will still be able to pay roughly 83 percent of promised benefits — even in the unlikely event that policymakers fail to act…..
E.g., when Big Ben Bernanke as Fed chair decided to do operation twist, then he could not dance the twist with the SS trust fund, nor could he manage SS trust fund securities durations for new issues, nor were they subject to price increases because of his purchasing plans.
How does the treasury pay for the US military?
Can you say a T bill bought yesterday the cash went to where is the federal schemes?
RC, I think trade deficit and federal deficit are chicken and egg, the chicken being too much demand too litle domestic production.
@paddy,
The general fund pays for the US military, not SS.
The treasuries that make up the SS trust fund are special treasuries that cannot be sold on the open market like regular treasuries.
You can look this stuff up. Google is your friend.
@Paddy,
Nothing in public finance is a simple as the folk that try to understand and explain it backed only by cursory investigation and the logic of family finance. The following from the same link as I referenced above:
…..What Happens to Trust Fund Surpluses?
When the rest of the budget is in deficit, a Social Security cash surplus allows the government to borrow less from the public to finance the deficit. (The “public” encompasses all lenders other than federal trust funds, including U.S. individuals and institutions, the Federal Reserve System, and foreign investors.) The Treasury always uses whatever cash is on hand — whether from Social Security contributions or other earmarked or non-earmarked sources — to meet its current obligations before engaging in additional borrowing from the public. There is no sensible alternative to this practice. After all, why should the Treasury borrow funds when it has cash in the till?
Money that the federal government borrows, whether from investors or from Social Security, is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and businesses. The bank depositors will get their money back when needed, and so will the Social Security trust funds. In fact, that has been happening since 2021, as the combined trust funds have been drawing down their accumulated reserves.
********************************************
When the US dollar was adopted as the international monetary exchange (FOREX) reserve currency during the 1944 Bretton Woods conference then eventual US trade and fiscal deficits were guaranteed to occur eventually as a matter of creating safe dollar-denominated assets for exchange reserves. JM Keynes argued this before the fact and later Robert Triffin explained it after the fact. So to this extent then facts do not matter because either people do not know the facts or do not understand the facts or are possessed of such willful ignorance to support either their priors or their profits.
@Paddy and @Joel,
The rather long article at the link below should be enough to glaze your eyes over on the related topics of SSA trust fund stock and flow processes.
https://www.ssa.gov/policy/docs/ssb/v75n1/v75n1p1.html
@Paddy,
The link below explains the SSA Trust Fund’s special securities, which has more to do with protecting the SSA Trust Fund from the price fluctuations of the Fed’s Open Market Operations than it has to do with the general partitioning of Uncle’s cash flows.
https://www.ssa.gov/oact/progdata/specialissues.html
Trust funds and types of investments
The Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund comprise the Social Security trust funds. Both funds are managed by the Department of the Treasury through their Bureau of the Fiscal Service. Since the beginning of the Social Security program, all securities held by the trust funds have been issued by the Federal Government. There are two general types of such securities:
The trust funds now hold only special issues, but they have held public issues in the past.
Special issue types and properties
There are two types of special issues: short-term certificates of indebtedness and long-term bonds.
The above properties of special issue securities are summarized in the following table……
{ continued at link above }
Both my husband and myself earned enough to max out SS every year (week 52 I got a dollar or two more when the tax cut off) and worked longer than full retirement. We have to be close to the top benefit for the years we retired. Those retiring since can get larger benefits, while we get the cost of living increases.
Half of our combined SS benefits is now greater than the low cutoff for taxability. Our 401K income pushes us into the 85% taxability.
That is so much more income than most of the people in this country get it is not funny. It is more income than we ever received when both of us were working. Paying taxes on it is a responsibility we are happy to have.
They could consider raising the cutoffs, which have not changed since SS benefits first became taxable, but don’t do it on my account.
We have a surcharge on Medicare too. It is still a bargain.
I agree with Joel. The only reason to reduce government revenue is to do harm. So far as I am concerned that is the only reason for any GOP proposal that reduces taxes of any kind.
Jane:
You and your husband did what we did. We maxed out years and our SS income is good. We draw from other funds for Dental Insurance. The VA finally took me in at seventy-something as a result of poisoning me at Camp Lejeune.
Fifty-something years ago and they finally do something when we are dying off. Of course, it minimalizes payout and disability claim. So why not wait on till we die?
Social Security is insurance against running out of money in retirement. Your benefit is your insurance claim. If you have other income, you are not as likely to run out, so it makes sense that your benefit would be smaller.
People with 401K or pension income are taxed, so untaxed SS benefits also have a preferential tax treatment. Nonetheless, there are no circumstances where single person with only SS income will pay taxes on their benefits. A single person with the average $23K per year benefit would need an additional $22.5K before they owed any taxes. Pretty much anyone complaining about being taxed is doing so from comfort.
The $25K limit for taxes is not indexed. If benefits were not already tax preferred, perhaps it should be, or possibly since pensions and SS benefits are not really on even footings, perhaps it is time to make adjustments.
From the 2024 report, Social Security collected $1045B in payroll taxes, $49B in taxation of benefits, and $63B in interest from special treasuries. With 95 percent of income from payroll, SS’s “portfolio” is its ability to tax.
Arne:
Thank you for chiming in on this. To add to this:
Substantial income includes wages, earnings from self-employment, interest, dividends, and other taxable income that must be reported on your tax return. Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. More than $34,000, up to 85% of your benefits may be taxable.
However, my point was not so much as to what is taxable for us peons. I might not be considered such in many respects. The issue here is why trump wants to make it untaxable. It would be helpful if the $25,000 untaxable limit was greater. Trump is not concerned about this either. It is those who make far greater than this in income retired or not.
@Arne,
“Pretty much anyone complaining about being taxed is doing so from comfort.”
Exactly.
Kinda reminds me of folks who boast about how much their property value has increased and then gripe about how their property taxes went up.
Why do we want to provide an incentive for retirees to work?
I am fortunate to have enough retirement income to be paying income tax. Most of that tax is from the taxable portion of Social Security, but income tax only amounts to 3% of our total income this year of about $93,000. In 2019, income was about $66,000, with 2/3 of that being SS – income tax was zero. The tax is not a significant burden to SS recipients and eliminating it would require addition funding for SS.
TB:
Thank you for your input. It is pretty clear Trump does not care for SS recipients and those paying into SS. It is all about the megarich, etc.
Does the couple really pay a tax rate of about 30% on benefits? No. The couple pays state and federal income taxes on their AGI. What is included in the AGI as income is a matter of state and federal tax law. The couple may pay premium surcharges based on their AGI; that’s a Medicare premium issue and not a “tax.” In any case if the couple is paying 30% more for Part B then their AGI is over $322,000. If their SS is one third of that amount it means combined they receive over $100,000 from SS and it’s hard to believe the Medicare premiums “significantly” reduce the SS or that he has any real inflation worries and if his “savings” has been invested then the gains over the last decade far out strip CPI inflation.
But notice in this example it’s not just SS under attack but ACA which increased the Part B/D premiums above designated AGI thresholds.
dd:
That is a different take. I will have to think about what you presented so as to understand it better. Not to argue, just to understand.
No problem. I did all sorts of calculations when we approached retirement. Also went to a financial planner who didn’t get the interaction among SS, RMD’s and taxable investments. There are three pillars to retirement and having all your “savings” in 401k’s leaves you wide open to tax issues as the income is taxable at higher rates while having accumulated investments in taxable accounts means one only pays the on the generated income and if it’s dividends then at a lower tax rate. So one assumes he’s upset because he tax-sheltered every dime in tax deferred retirement accounts and now pays a higher rate for every withdrawal. There’s the Roth thing too; but that really only works for CEO’s with stock options that increase in value over time so as to avoid taxation when it’s time to convert.
Needless to say the tax code is written for the mega-wealthy. The biggest clue is why is interest income and wage income taxed differently from dividends and long term capital gains? It’s all income and should be taxed at the same rate.
dd:
Thank you.
You added a lot of information for everyone to read.
If you care to write a formal commentary for AB. I will post it for you and we do not have to have your name revealed too. Always looking for good things to post.
I do not want to scare you off either. I would do similar for others who can write.
Bill
Treat it like annuity income. Just tax all of it for everyone and let the deductions, brackets and marginal rates determine who pays and how much. Put the funds in general revenue. Then reform SS and Medicare to met their revenue needs via their own specific taxes. Cut through the fog here and millions are experiencing this: a special social security tax on a type of income otherwise never subjected to social security taxation at a variable rate which in many, many cases greatly exceeds the full social security rates and in some cases is on income that is over the income cap. Trump’s right if his message is this is bs. If we think it is proper to tax this, then just levy the normal taxes on it.
Eric:
You wish to reform SS when all it needs is a tweak to secure it for the next seventy something years. Also, putting this in trump’s small hands and Republicans is silly. That is cutting through the fog.
Thank you for the complement; but I’m no expert; it’s just finance, SS, Medicare premium planning and retirement taxation became my “special interest” when I realized that there was no place to go for integrated advice which is a feature not a bug of our “retirement” system. For example, my financial planner generated a lovely computer graphic of 5000 possible outcomes that had nothing to do with the actual reality of how Medicare premiums would be impacted, how that in turn would impact SS payments, the likely taxation issues (depending on where funds were drawn from) and of course the rest of our budgeting. But the positive was it made me plan and start shifting employment earnings from the 401k to outside savings (and the horror of paying income tax on it at a higher rate /s/) in anticipation of needing non-401k funds in retirement that don’t trigger Medicare/AGI and additional taxation issues. We were also fortunate enough to be earning plenty of income and my spouse worked into his ’70’s.
It’s worked for us; but I’m pretty sure it’s not the approved recommended strategy as it doesn’t take full benefit of the tax deferral strategy.
dd:
You do not have to be an expert. You just have to write in a legitable manner.