Legislative Update: June 2022

High Inflation Could Lead to Higher Taxes for Social Security Recipients

By Doug Osborne, Legislative Liaison

The next tax season could be a difficult one for many unsuspecting older taxpayers.  TSCL believes many older adults who haven’t owed federal income taxes on their Social Security benefits in the past may start doing so next year.  That’s because, until 2022, their incomes have been lower than the income thresholds that subject Social Security benefits to taxation.  Because the annual cost-of-living adjustment (COLA) boosted benefits by 5.9% this year, and record-setting inflation has created the need to withdraw larger amounts from savings, millions of retirees could wind up with a higher tax bill than usual next tax season.

TSCL thinks a temporary two-year suspension of the taxation of Social Security benefits would help older taxpayers who have been struggling to meet rising prices while living on a fixed income.  A temporary tax holiday would allow older adults, most of whom live on fixed incomes, to keep their benefits tax-free during this period of high inflation.  Corporations received a Social Security payroll tax holiday during 2020 as a provision of COVID relief legislation — now it’s time for Security beneficiaries to get their turn!

About half of all Security recipients can owe federal income taxes on a portion of their Social Security benefits.  While those with incomes below $25,000 (single) or $32,000 (joint filers) pay no tax on benefits, retired households with incomes higher than these thresholds can owe taxes on up to 85% of their Social Security benefits.

In 1983, when Congress enacted the tax on Social Security benefits, it was estimated that the tax would affect just 10% of the highest income Social Security recipients.  But unlike income tax brackets, the income thresholds were never adjusted for inflation.  Today, roughly five times more taxpayers (50%) owe taxes on a portion of their benefits.

The proceeds from taxing Social Security benefits are credited to the Social Security and Medicare Trust Funds and form an important source of funding for the benefits of current beneficiaries.  In 2021, Trustees forecast that the Social Security Trust Fund would receive almost $94 billion from the taxation of Social Security benefits in 2022 and 2023, while the Medicare Hospital Insurance Trust Fund (Part A) would receive almost $33 billion over the same period.

TSCL believes, however, that Congress can provide some temporary tax relief and strengthen Social Security Trust Funds at the same time.  The steady recovery of jobs since 2020 is boosting Social Security payroll taxes, and this would continue to provide funding for Social Security and Medicare in the short term.  In addition, we think Congress is long overdue to update the number of wages that are taxed for Social Security benefits.  Most working adults pay Social Security taxes on every dollar earned, but the highest-paid workers pay Social Security taxes on a portion of their earnings, which depending on income is sometimes a very small one.  Today, the nation’s highest-earning employees pay Social Security taxes on just the first $147,000 of their earnings, even if they are a CEO of a major company, and their income is in the millions.  According to TSCL’s Senior Survey, 72% of survey participants think the Social Security payroll tax should be applied to all earnings.

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