Cutting the Retiree Social Security Tax

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Angry Bear
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This does not make sense.

Between Fund payouts and Social Security, we were well below $100,000. After deductions and expenses (mortgage, property tax, donations, etc.) our income taxes were very small. We set a side 7% of our SS for taxes and we had plenty left over. We are not the poorest and definitely not the richest. If we follow Trumps suggestion, we will be favoring the very rich getting Social Security. The ones who can afford to pay.

Trump’s Tax-Cut Proposal Shakes Up Social Security Debate – WSJ

Donald Trump’s plan to repeal income taxes on Social Security benefits would eliminate an unpopular levy, make it easier for older people to keep working, and leave a big hole in the program’s finances. 

At $1.5 trillion over a decade, Trump’s tax cut for Social Security recipients is one of the former president’s largest new policies as he seeks to return to the White House. It is smaller than extending expiring tax cuts but bigger than ending taxes on tips or lowering corporate taxes for domestic manufacturers. 

Trump’s proposal has revived a dormant debate over taxing Social Security benefits when they are paid out. His plan is unlikely to pass Congress unscathed if he wins this fall, but lawmakers will have to examine the program’s finances by the early 2030s. Beyond seeking ways to extend Social Security’s solvency, they might look to trim the tax on benefits. 

The income tax on benefits hit 50% of Social Security recipients in 2023, according to the Social Security Administration, up from 10% when Congress created the tax in 1983. Many retirees are surprised when they learn about the tax liability, and surveys show the Trump proposal has touched a nerve.

In a recent Wall Street Journal poll, 64% of respondents said they strongly favored eliminating taxes on Social Security benefits, with another 19% somewhat favoring the policy and 10% opposed. When asked whether they backed that change even if it increased the national debt, the share of those indicating support dropped to 41% and 26%, still leaving a significant majority in favor. 

Michael Feeney, 68, of Arlee, Mont., said his and his wife’s Social Security benefits have been significantly reduced by surcharges they pay on Medicare premiums, which are deducted from benefits. Because Montana is one of a handful of states that tax at least some Social Security income, the couple face a tax rate of about 30% on benefits, said Feeney, who said Social Security comprises one-third of their retirement income.

The former executive at a life-sciences company said he has concerns about Trump’s proposal, including how the government would make up the lost tax revenue. But, he said, the policy change would let him reduce withdrawals from savings and help alleviate his anxiety over inflation.

A bill supported by most House Democrats would reduce, but not repeal, the tax while expanding benefits. The bill would replace the lost revenue and then some by imposing taxes on wages and investment income above $400,000. It would be a stark change from today’s Social Security payroll tax. The tax applies only to wages and self-employment income and stops at $168,600.  

“We do something he doesn’t,” Rep. John Larson (D., Conn.), the Democratic bill’s chief author, said of Trump. “We pay for it.”

Congress began taxing Social Security benefits during the last major legislation that put the program on a solid long-term footing. Since that bipartisan compromise, ideas to shore up the program have gone nowhere. In about a decade, Social Security is projected to lack enough money to pay all of its obligations. This triggers an automatic benefit cut unless lawmakers act. 

Income taxes on benefits now make up about 4% of Social Security’s revenue. Repealing the tax would hasten the day when the program can’t pay full benefits. Congress raised the tax in 1993 and directed that money to Medicare. Lawmakers intentionally set income thresholds for the tax without inflation adjustments, and it affects more people over time. Beneficiaries who pay the tax generally have wage or investment income beyond Social Security. 

Nancy Altman . . .

“From the beginning, it’s not been well understood and was very unpopular. Nancy was a staff member for the 1983 commission that developed the plan. Now she is the president of the advocacy group Social Security Works. 

Social Security recipients must calculate their income, adding in half of their benefits. If the total income exceeds $25,000 ($32,000 for married couples filing jointly), up to half of benefits are taxed. If it exceeds $34,000 ($44,000 for married couples), up to 85% of benefits are taxed. The system can create high marginal tax rates for working Social Security recipients. They simultaneously face regular taxes and taxes on more of their benefits as income goes up. 

If recipients could keep more of each dollar they earn, some might return to work. Or they may work longer than they had planned, or work more hours. Alternately, the tax cut could also accelerate retirements. Retirees would get larger after-tax benefits and have less need for additional money. 

“More so for the elderly than for any other population, people can be very, very different. Some people are working because they could never retire. They love their job,” said Steven Haider, an economist at Michigan State University who studies aging. “Other people are working because they’re having a hard time making ends meet.”

Trump’s proposal has spurred experts to consider more-efficient ways to have similar effects on the labor force.

Kyle Pomerleau of the conservative-leaning American Enterprise Institute. One option would be to include benefits in income from the first dollar and raise the standard deduction. That would prevent high marginal tax rates on working beneficiaries. 

“You don’t need to hemorrhage $1.5 trillion in order to get the labor supply effects that some proponents want,” Pomerleau said. 

Another option would lower payroll taxes for people who already have the maximum 35 work years to get full benefits, said Gopi Shah Goda, an economist at the Stanford Institute for Economic Policy Research. That, she said, would provide a more-targeted incentive for retirees to work. 

Eric Beckman, a 71-year-old retired engineer in East Marlborough Township, Pa., said Trump’s proposal would be “good for the country,” since it would boost incomes of middle-income retirees like himself, though he worries about the federal government’s finances.

The tax cut would benefit 16% of all households, according to the Tax Policy Center, providing an average boost of $3,400. That would pump money into the economy and leave an equal-size gap in Social Security’s finances. 

Nancy Altman . . .

Trump “gets the politics, and he understands how popular taxation of benefits is. So he’s thrown it out there. But again, without addressing the underlying shortfall, it just deepens the shortfall.”