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Along with changes to the application of the COLA there is discussion about changing the way and amount of income taxes applied to SS benefits.
It’s quite complex, but here is a link to some alternatives from the Committee for a Responsible Federal Budget. https://www.crfb.org/papers/new-approaches-social-security-benefit-taxation
One proposal in the CRFB (a Washington think tank) working paper notes “The the 1983 Greenspan Commission considered an option to make (social security) benefits tax free until cumulative benefits reach cumulative post-tax contributions and count all subsequent benefits as income” .
I was practicing in a CPA firm in 1983 when the previous rule for social security benefits was that all such benefits were not taxable and the debates about how to fairly tax social security began to occur more frequently. If you look at the 1983 1040 form there was not even a line for social security benefits.
Prior to 1986 the IRS had a three-year rule, optional by the taxpayer, for recovering basis on contributory pensions and employee annuities and that option was repealed by the Tax Reform Act of 1986. The old annuity rule seems similar to me to what is now a option the CRFB is proposing for determining the taxable amount of social security benefits . The 1986 amendment also capped total tax-free exclusions over the life of the annuity/pension to the exact amount of the taxpayer’s investment and also included a deduction provision for unrecovered basis if payments ceased prematurely due to your death.
I thought the previous three year rule for annuities and pension benefits was a fair and simple method and have thought the elimination of the three-year was simply typical government think to accelerate tax collections. In regards to social security benefits I think the Social Security Administration is already tracking what social security taxes each of us has paid in should future benefit taxation consider something like the old three-year rule.
I think our tax code could use a good dose of simplicity, like the old three-year basis recovery rule, especially where many current tax provisions basically benefit how you structure an event instead of its substance in determining your tax. I am not taking bets on a simpler and more equitable tax code occurring during my lifetime and plan to make my decisions to legally minimize my personal taxes under existing and future tax laws.
Plan accordingly.
An aside – Note the 1983 form, page 2, required the preparer to include their full SSN on every return you signed for a client. Not everything old was good.
I appreciate that CRFB lays out a number of actions to deal with the pending benefit reduction. The CRFB website has what they call “the reformer”, which allows users to experiment with the various elements of the SS benefit formula and figure out a method to keep SS funded.
Surely, our politicians can find a strategy or multiple strategies which all of us, whether future or current earners and current or future recipients, can share in funding!
They sure could if they want to. I use that tool all the time. And note that eliminating the wage cap does not make SS sustainable.
I read this with great interest, though the tables were making my eyes glaze over a little bit. It is interesting seeing the alternatives and having them explained in some detail. I feel that changing the way we pay tax on SS will be one of several elements of a solution. Of course, the final answer to fixing SS will require all parties involved to make sacrifices, not just current recipients; it won’t be a good plan until everyone is peed off.
So come on politicians, grow some backbones and get it done!
You make a critical point. Current and future workers as well as current and future retirees must share the pain of the changes necessary to make SS solvent and sustainable.
The shame is on this and past administrations for not acting decades ago with the result being creating pain greater than should be necessary. Even now there are politicians proposing to increase benefits before we do anything 🥵