Is Taxing Social Security Benefits Good Policy?
Q: Can you explain why Social Security benefits are taxed? We paid for our benefits through payroll tax withholdings during our entire working careers and since we have retired, we’ve paid taxes on our Social Security benefits. This is double taxation! How is this good tax policy?
A: During working years, Social Security payroll taxes are withheld from all earnings up to the taxable maximum which is $137,700 in 2020. Then once an individual begins to receive Social Security benefits, a portion of those benefits may be subject to taxation depending on income. This indeed seems like double taxation.
When Congress first made Social Security benefits taxable in 1984, the tax affected less than 10 percent of beneficiaries. It was sold to the public as only affecting high income retirees. But today more than 50% of retirees pay the tax on Social Security benefits. Unlike income brackets that are adjusted upward every year, the income thresholds that subject benefits to taxation were never adjusted for inflation. Consequently, even taxpayers with the most modest of incomes are affected by the tax today.
Social Security recipients must pay the tax if their modified adjusted gross income, which includes one half of total gross Social Security income, is $25,000 - $34,000 (single filers) or $32,000 – $44,000 (couples filing jointly). Those who are subject to taxation pay the lesser of 50% of benefit income or the amount of modified AGI in excess of $25,000. The revenues raised is credited to the Social Security Trust Fund.
A second tier of taxation affects taxpayers with higher incomes of more than $34,000 (single filers) or $44,000 (couples filing jointly). Up to 85% of benefits could be taxable and these revenues are credited to the Medicare Trust Fund.
Proponents of taxing Social Security benefits point to its importance in financing Social Security and Medicare. In 2018 the Social Security Trust Fund received $35.7 billion in revenues from the taxation of benefits while the Medicare trust fund received $25.1 billion.
TSCL’s Senior Survey has found that 55% of survey participants support lifting the income thresholds that subject Social Security benefits to taxation from $25,000 to $50,000 for single filers and from $32,000 to $100,000 for joint filers. While 32% were uncertain, only 12% were opposed.
Legislation in Congress would lift these income thresholds in a fiscally responsible way by providing new sources of revenue to replace lost revenues by the following:
- increasing the amount of wages subject to payroll taxes. In 2020 individuals earning $137,700 pay no Social Security taxes on earnings above that amount.
- very gradually increasing the payroll tax rate.