Q & A
Ask Rusty – Is Taxing Social Security Fair?
Dear Rusty: Taxing Social Security benefits isn’t fair. It would benefit everyone if seniors could earn as much as possible without having their Social Security taxed. We would still be paying into Social Security which would help the fund. I also feel that all people earning over $100,000 should pay into Social Security because they can afford it. This would help fund Social Security without hurting anyone financially. Many seniors are struggling financially and should be able to earn as much as we can without a portion of our Social Security being taxed. Signed: Overtaxed Senior
Dear Overtaxed Senior: Few would argue that paying income tax on Social Security benefits is fair. Nevertheless, Congress enacted taxation of Social Security benefits in 1983 as part of a reform package which restored Social Security to solvency at the time. When the law was first enacted, 50% of SS benefits were taxable for single tax filers who earned more than $25,000 and for married couples who earned more than $32,000. That was the law until 1993 when Congress added another threshold for both single and married filers. The 1993 law allowed up to 85% of SS benefits to be taxed for single filers who earned more than $34,000 and for married filers earning more than $44,000.
Ever since enacted, those laws have been viewed as unfair by many senior organizations and especially by the individuals who paid income tax on their benefits. The unfortunate reality is that eliminating income tax on Social Security benefits without also implementing other offsetting reforms would exacerbate Social Security’s now tenuous financial condition (income tax on benefits added $41 billion to Social Security’s revenue in 2020). Thus, calls today for repealing income tax on Social Security benefits go largely unheeded. It’s worth noting that 13 U.S. states also levy a state income tax on Social Security benefits.
Although the payroll taxes you pay into Social Security while working are different from income taxes on your benefits, people earning over $100,000 today do pay into Social Security through a FICA tax (or self-employment tax) on their earnings. Paying this tax is what entitles you to receive Social Security benefits. The 2021 threshold after which SS contributions are no longer taken from earnings is $142,800, and this amount goes up a bit each year. But even completely removing that payroll tax cap and further taxing higher earners would not fully resolve Social Security’s current financial issues. Social Security’s Trustees predict that monthly benefits are at risk of reduction starting in 2034 unless Congress acts to reform the program. Eliminating income tax on benefits is one of many suggestions now being considered in reform proposals, as is increasing (or eliminating) the payroll tax cap. Whether Congress will include either of those suggestions in future Social Security reform legislation is anyone’s guess.
So, while we agree that levying income tax on Social Security benefits amounts to “double taxation” (because you also pay income tax on your earnings used to qualify for Social Security), taxing your Social Security income is, nevertheless, permitted under current law. As unpalatable as that law may be, and as unfortunate the effect is on struggling seniors, the AMAC Foundation can only offer guidance on how existing Social Security laws and regulations affect those who contact us. However, our parent company, the Association of Mature American Citizens, is very well aware that paying income tax on Social Security “isn’t fair” and regularly lobbies Congress on that topic.
Dear Rusty,
Although eliminating taxation of S.S. benefits would harm the fund, a reasonable increase in the threshhold of $44,000 could be increased to account for inflation. Although an increase fully indexed to inflation would raise the threshhold to more than $80,000, a more modest increase (possibly to $60,000 would be a big relief for middle income retirees.
Walter,
Your feedback is right on target. The thresholds at which Social Security benefits become taxable have not been adjusted since taxation of benefits was first enacted in 1983. Thus, each year, more and more people find that they must pay income tax on their Social Security benefits. In 1983, the average wage was about $25,000, about the same as the threshold set for taxing SS benefit. That meant at least half of American workers fell below the threshold where benefits would be taxed. Though the minimum tax threshold has remained static at $25,000, the number of American households with 2020 income under $25,000 is now about 18%. So it’s easy to see how not adjusting those taxation thresholds for inflation has ensnared an increasing number of Americans into paying income taxes on their Social Security benefits. The more modest adjustment you suggest is certainly one way of mitigating this issue, but the broader issue of whether taxing SS benefits amounts to double-taxation should also be part of the discussion. In any case, a more comprehensive reform of the Social Security program, such as that proposed by AMAC at http://www.amac.us/social-security, is certainly called for to avoid a cut in SS benefits about a decade from now.
Russell Gloor
National Social Security Advisor
The AMAC Foundation