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You betcha, but also necessary – unless you have a better idea to generate income for the Social Security and Medicare trusts.
You and I did not pay for our Social Security benefits. In the aggregate all beneficiaries have paid for about 15% of benefits received. I did not contribute toward my pension so it’s fully taxable. If I had contributed on an after-tax basis that portion would not be taxed.
I looked at the total I paid in FICA taxes as well as what my employers paid from 1959 until I retired in 2010. We received in SS benefits, including my wife’s benefit on my earnings, all I and my employers paid in taxes within about six years of starting Social Security payments.
As with most government programs there is much confusion. Some people think they will pay 50% of their benefits in taxes. Of course the reality is that while a portion of the SS benefit may be taxable income, what is actually paid in taxes depends on a persons overall tax situation and income tax bracket.
Critics note that the income point at which SS becomes taxable is not indexed for inflation. That’s true, but by design presumably so revenue increases over the years.
The taxability of SS benefits can be minimized if retirement income is virtually all from Roth accounts which does not count in the Modified Adjusted Gross Income calculation – now, in my opinion that is unfair. Income in retirement is income after all.
The bottom line is the taxability of up to 85% of a Social Security payment is a important funding source for both the SS and Medicare trusts. The SS trust receives $50 billion a year from the taxation of benefits and the Medicare trust $35 billon a year.
Both the Social Security and Medicare trusts need additional revenue which will require higher taxes or benefit changes. Eliminating the taxability of SS benefits means more of the needed revenue must come from working Americans and future retirees.
“Beneficiaries pay only 15% of benefits received” is VERY misleading. Payments are made 20, 30, or 40 years prior to receiving benefits A $1 payment would grow to about $5 in 40 years at a rate of just 4%
It’s insurance, not an investment and it provides a wide range of benefits well beyond what may be received by the worker paying taxes.
I don’t think that fair has much to do with it. No matter how you address the SS funding shortfall, some will do better than others with regard to how much they get out vs how much they put in.
In this situation there are no solutions, only tradeoffs.
I view taxing SS benefits as a form of means testing, and I don’t have a problem with that. I also agree with Quinn’s point that Roth IRAs are a form of means and should be included in MAGI calculations.
Unfortunately, a lot more needs to be done to fix the SS shortfall as the SS trust fund is expected to be depleted by 2033 and FICA payroll taxes will not be enough to cover SS costs. Alot more pain to go around.
As far as investing SS trust funds in the stock market. I see multiple problems. First the trust fund is being depleted and will be empty in 10years – i.e. this is effectively shorter-term money. So investing in equities would take on significant risk. Another is that the trust fund money is not sitting in cash somewhere to be easily redeployed. They are bonds that would have to be redeemed from the Treasury. Where would the treasury get the cash for that? Finally, and most importantly, investing the trust fund in equities makes the US govt an investor with a say in how companies run their businesses’. Does anyone think that politicians would not use that leverage to try and influence how companies conduct their business. Count me in as a hard no on that front.
The bonds are being redeemed now to pay full benefits. Presumably the feds issue new debt to cover the cash. The sad thing is there’s a combination of relatively minor and painless changes that can be made to make the program solvent for next 75 years.