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It would be nice, quite a windfall.
However, we didn’t pay for our benefits. In the aggregate, beneficiaries pay for about 15% of all benefits received, hence maximum 85% of benefits being taxable. I checked my records a found that within six years of starting, I collected benefits (including spousal benefit) equal to all the taxes I and employers paid since 1959.
The law says the benefits are taxable income, but given the standard deduction, a lower income retiree may pay very little or no actual taxes on the benefits received.
The income taxes paid go to the Social Security and Medicare A trusts, not general revenue. Both trusts are underfunded and being depleted in a few years.
How do the programs make up the lost tax revenue? We have yet to hear of a plan to make either Social Security or Medicare sustainable.
So, is it fair, prudent or necessary to make Social Security benefits income tax free?
I have asked many people and overwhelmingly the answer is yes, benefits should be tax free – while they also demonstrated a total lack of information or understanding of the issue, with many still believing Congress stole the trust funds or they could have done better investing on their own without paying SS payroll taxes. Oh my. 😱
If specific sources of income are to be untaxed then those taxes must be collected elsewhere. I’ve always considered a tax, any tax, as being a part of the cost of living and I think of my life as akin to running a business. I have been self employed. As I recall that meant I paid my share, my employer’s share as well as any Medicare tax. Oh, and let’s not forget about Worker’s Compensation insurance (there’s a story there). My first paycheck upon which I paid SS tax was 1964 and my last was 2023. That’s a span of 59 years. What I’ve earned in SS benefits as a retiree outweighs what I paid in, but it pales when compared to the benefits of some of the public service workers I know. I now provide my services without pay as I no longer want to bother with the federal forms and tax payments, etc. I suppose one could say that by donating my services I am contributing to the demise of the entire social security system. LOL.
Wow, 6 years. Fascinating! I never would have imagined that. Way to put a sharp pencil to this.
As the old saying goes: “There is no free lunch.” If we exempt SS benefits from taxation, the taxes that would otherwise be collected on these payments will not be available to fund future SS benefit payments.
Which reminds me of another old saying: “Robbing Peter to pay Paul.” If we exempt SS benefits from taxation, the retirement fund’s reserves – absent other needed changes – will simply be exhausted sooner, leaving many current and future recipients with less than they earned or were promised.
There is great need to address the ongoing funding of the SS program, but across the range of possible options to address this need, eliminating taxation of current benefits should be seen as little more than the political stunt that it represents.
It would be more honest to take any taxes collected on social security income and pay them into the SS trust fund. Instead, politicians take the funds, allocate to general revenue and then spend them as they wish.
Absolutely not true. Politicians do not take the funds and allocate them to general revenue.
I even explained what happens to the taxes in my article. The taxes paid go into SS and Medicare Trust funds.
As a retiree, the answer is heck yes. Practically, the answer is likely no.
A truly honest sentiment Jeff.
Although I would benefit from no tax on SS, I do not agree that everyone should benefit from such a change. I could accept some relief on the lower end, more affluent people, myself included, should still pay. They could increase the taxable income level subject to taxes to provide that relief on the lower incomes.
Of course, as always when we are talking about tax cuts, who is going to pay for it?
I’m taxed on the maximum of 85% of my SS benefits, but I don’t consider it unfair. I do wish that the method of calculating the percentage weren’t so convoluted, however. I’ve never seen a clear explanation of the calculation. I finally studied the IRS worksheet and figured it out, but I don’t think that I could explain it to someone else. Also, the thresholds used to determine what portion is taxed haven’t been changed since the tax began in 1984, so a much higher percentage of SS recipients are taxed now.
Most people think of Social Security as insurance but, at its heart, it’s a welfare program. People with low income during their working years receive a much higher percentage of their previous income in SS benefits that do higher-income recipients. How benefits are figured is another hard-to-understand facet of SS. Recently there’ve been a lot of outcries about the reduction in SS benefits for those who receive pensions for work that wasn’t covered by SS taxes. There’s a logical reason for the reduction, again tied to the way that SS benefits are calculated that few understand. I started my career in a Federal job which wasn’t covered by SS at the time and would be hit by the reduction in SS if I had stayed in the job long enough to receive a pension.
The SS trust fund is an accounting entry in the government books and has never really existed as a separate entity. The money is invested in government securities so it can be claimed that Congress borrowed the money in the fund and spent it on something else. However, it must be invested in something, and government securities are generally considered the safest choice.
As a financial planner that advised clients for decades on Social Security strategies, I find this conversation fascinating. Most folks know nothing about the “math” behind