The Congressional Budget Office (CBO) recently reviewed a proposal that would boost the taxable amount of Social Security benefits, as one of the options for Congress to consider to reduce the federal deficit. The proposal, which the CBO has reviewed in prior versions of its Options to Reduce the Deficit, would tax Social Security and Railroad Retirement benefits the same way that distributions from defined benefit pensions are taxed. This is expected to increase (perhaps considerably) the taxable income of older Americans.
Under current law, Social Security beneficiaries whose total income exceeds specific thresholds are required to claim a portion of their Social Security benefits as taxable income. Depending on income, as much as 50% to 85% of Social Security benefits could be taxable. A bulletin from the Social Security Administration estimates that the median share of benefits owed as tax for most retirees would be far less than that, however, remaining close to 12% over the period 2020 to 2050.
The revenues raised from the taxation of Social Security benefits are used to pay Social Security and Medicare benefits. In 2017, the Social Security trust fund received $35.9 billion of its $825.6 billion in revenues from the taxation of benefits and the Medicare trust fund received $24.2 billion of its $299.4 billion in revenues.
The CBO option would change the taxation of Social Security to be more like distributions from defined benefit pension plans. Those distributions are fully taxable except for the portion that represents the recovery of “basis,” or what an employee paid in — that is, his or her after-tax contributions to the plan. Once the recipient has recovered his or her entire “basis” all subsequent pension distributions are fully taxed.
The Joint Committee of Taxation estimates this option would increase revenues, in other words, raise your taxes, by $411 billion from 2019 through 2028. The increase would be even greater after the temporary provisions of the 2017 tax legislation, that lowered rates and increased the standard deduction, expire at the end of 2025.
TSCL’s annual Senior Surveys indicate that roughly 56% of retiree households pay tax on a portion of their Social Security benefits. About the same number support reducing the taxation of Social Security benefits by lifting the threshold for taxation of Social Security benefits from $25,000 to $50,000 for single filers and from $32,000 to $100,000 for joint filers.
The Senior Citizens League continues to monitor the CBO’s tax proposal. TSCL supports bills that would reduce the taxation of Social Security benefits while making Social Security payroll taxes more equitable through ensuring that all workers pay their fair share of taxes on all earnings.
Sources: Options for Reducing the Deficit: 2019 to 2028, Congressional Budget Office, December 2018.