Taxing Social Security Benefits

Like the minimum wage, paying taxes on SS benefits hasn't changed much in years.

I finished our joint (hooray for marriage equality!!) federal tax return a couple of weeks ago. It has always pained me that we pay quite a bit in federal taxes even though we are retired and living off our pensions and Social Security incomes. We draw some of our IRAs for extra things like travel or home remodeling, and of course that money is taxable (and should be).

However, 85% of our Social Security and 100% of our pension income is taxable as well. Why, because President Reagan wanted to pay for tax cuts to the wealthy. Sound familiar?

Back in 1983, Congress passed (and Reagan signed) the Social Security Act Amendments of 1983, which made SS income taxable if you made more than $25,000 as a single filer or $32,000 filing jointly. If you made more than those thresholds, then 50% of your SS income was taxable. Ten years later, Congress added another threshold ($34,000 for singles, $44,000 for joint filers) where 85% of SS income was taxable. Originally, the tax on SS went back to the Social Security Trust Fund, but after 1993 the difference between the 50% and 85% taxes are paid into the Medicare Trust Fund. Read this for all the details.

So what’s the issue? Paying back money into Social Security (and now Medicare) helps those programs stay solvent, right? Well, sort of.

The ceiling for paying FICA (aka Social Security) and Medicare taxes on income has risen every year. Last year, you paid Social Security taxes on income up to $168K, and this year that amount rises to $176K. However, the income levels upon which Social Security income is taxed has not changed in over 40 years. If that threshold had been set to increase with the rate of inflation every year, the amounts this year would be $79,736 for single filers and $102,062 for those filing jointly.

Why hasn’t Congress addressed this? Because the Republicans are so focused on tax breaks for the ultra-wealthy that retired folks on fixed incomes get fleeced. I don’t have a problem with Social Security being taxable (and we would probably still have to pay taxes on ours), but it needs to be fair. Because the reality is that too many people are struggling to make ends meet when their primary income is Social Security and, if they’re lucky, a pension.

Costs for basic needs for seniors, like medications, food, insurance, etc. are rising faster than incomes can keep up. (My pension can only be increased by a contractual maximum of 2% per year, so I got stiffed in 2021-23 when Social Security cost of living adjustment increased our monthly deposits by 5.9%, 8.7%, and 3.2% respectively.) Thankfully, we have some savings to help offset the difference, and we hope that our savings will last us the rest of our lives. But who knows?

I am aware that the current congress is unlikely to take this up. I’d love for AARP or the Alliance for Retired Americans to take this on. If we had a smaller federal tax bill every year, we could do more to help our local economy. That would be a good thing! One way to pay for this would be to eliminate the income cap for paying into Social Security. What is clear, however, is that cutting taxes on the top income earners (who already take advantage of many loopholes and income workarounds) unfairly burdens low- and middle-income folks. And we already have documented evidence that the economy gets no benefit when the wealthy get a tax cut.

It’s time for a change, and it will start with electing Democrats to Congress in 2026. I’m ready, and I hope you are too.

Photo Credit: License: Creative Commons 3 - CC BY-SA 3.0, Attribution: Alpha Stock Images - http://alphastockimages.com/, Original Author: Nick Youngson - http://www.nyphotographic.com/, Original Image: http://www.picpedia.org/clipboard/social-security.html