Debate Over Taxation of Social Security Payments

Trump's Proclamation on Social Security Tax

Former President Donald Trump made a statement on Truth Social in August, declaring that seniors should not be taxed on their social security. In essence, this suggests that current retirees should retain more of their money, even if it means future retirees might face steeper reductions in benefits over a shorter period. Whether or not this trade-off appeals to voters, the issue of taxing Social Security benefits is a topic that needs to be addressed before the next election.

Background of Social Security Taxation

The rules governing the taxation of Social Security benefits have been in place for three decades, and there is a growing belief that Congress has not been as vigilant in monitoring these rules as it should have been. The taxation of benefits is a significant source of revenue for Social Security, projected to generate nearly $60 billion this year alone, equivalent to the contributions of approximately nine million workers who will never collect benefits. This revenue is expected to double in the next decade.

Justifying the Tax

However, the importance of the revenue generated should not be the sole justification for the tax. The taxation of benefits was introduced in 1983 as a compromise to generate income for future benefit payments. This policy accounted for about a third of the total effectiveness of the legislative package that stabilized the program's projected finances from 2030 to 2057.

Increasing Tax Reach

Four decades on, the tax is affecting an increasing number of people due to two main factors. Firstly, the threshold that triggers the tax is not adjusted for inflation, resulting in a decreasing real-term definition of "substantial outside income". Secondly, components of "outside income", especially wages for retirees who continue to work, are rising faster than inflation. Consequently, over half of beneficiaries who file taxes pay a levy on some portion of their benefits, with an average worker in the U.S. working 30 hours per week likely to face a marginal tax rate of over 40% on their benefits.

Why 85% of the Check is Taxed

Many question why 85% of the check is taxed. In 1983, Congress required seniors to pay a tax on 50% of their benefits, but this was increased to 85% in 1993. Supporters of this change justified it based on research from the Social Security Administration actuarial team, which found that even in a worst-case scenario, a beneficiary would make $0.85 cents of profit on every dollar received in benefits. However, it's unclear whether the calculations made in the late 1980s have proven beneficial for current retirees.

Income Tax on Retirees

Currently, the government collects income tax from retirees who need to work to make ends meet at a marginal tax rate usually reserved for high-income individuals like Warren Buffett. It's uncertain whether this money is income or not, as no one has taken the time to verify this. What is known is that the program's trustees expect seniors to pay an extra $8 to $9 billion annually in taxes due to the expiration of the Tax Cut and Jobs Act in 2026, potentially making this already unpopular tax even more disliked.

Need for Oversight

Despite its importance to Social Security, the tax is not being closely monitored. It has been allowed to drift from year to year, decade to decade, and generation to generation without much consideration of its impact or its application. The prevailing rationale in Washington seems to be that retirees should pay the tax this year simply because they paid it last year. Before any repeal of the tax, Congress needs to determine whether there is any profit in the money received by seniors and then discuss who should be subject to the tax.

Bottom Line

The taxation of Social Security benefits is a complex issue with far-reaching implications for both current and future retirees. It's clear that more oversight and analysis are needed to ensure this policy is fair and beneficial for all involved. What are your thoughts on this issue? Do you believe Social Security payments should be taxed, and if so, to what extent? Share your thoughts and this article with your friends. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.