Social Security is the backbone of the U.S. retirement system. It allows seniors with retirement benefits and disability income to be qualified individuals.
Unfortunately, the system is facing a massive financial problem. With the cost of life rising and the tax rate being fixed, a cap has been created between the money coming in and going out. Some politicians have suggested axing the tax on Social Security to fix the issue, but this may create unintended consequences.
How Does Social Security Work?
The Social Security Administration (SSA) is a federal agency known for providing individuals with retirement benefits. However, it also provides survivor benefits and income for workers who have become disabled.
Right now, over 72 million Americans collect benefits from Social Security. Throughout their working life, people pay into the benefits through their paychecks. The money is collected by the government and invested before being paid out through different channels.
Money Is Running Out
Right now, the issue with Social Security is that costs have been rising but the tax rate remains the same. This means that there is a gap between the money coming in and the money going out.
In the short-term, the government has been using assets in the trust fund to make up for the difference. However, the trust funds being used will be depleted in the first half of the 2030s, and if Congress does not act soon, benefits will need to be cut by around 20%.
How to Maintain the Current Level of Benefits
If the government wants benefits to remain at the current level, a commitment that the Republican party has introduced, the system needs to bring in more money.
When former President Trump announced that he would cut taxes on social security, allegedly allowing seniors to keep more of their money, he actually proposed a way to bankrupt the entire system at a much faster level.
Benefits Weren’t Always Taxed
Social Security benefits were not always taxed. The legislation was introduced in 1983 produces additional revenue to cover the shortcomings in the system.
The taxation of benefits under the federal income tax imposes a higher rate on those with higher incomes, benefits the final goal of paying out more benefits as people age and inflation increases.
Taxation on Benefits Could Be Better
Although the proposed tax cuts on Social Security benefits would create more problems than benefits, the system could easily be improved.
The nature of the threshold for taxes on income could be better distributed.
Current Tax Brackets
Under the current taxation system, a married couple with less than $32,000 of modified adjusted gross income (AGI) does not pay any taxes on their retirement benefits.
Anything above this threshold, recipients pay taxes on up to 50% or 85% of their total benefits.
The Difference in Federal Income Tax and Social Security Benefits
Unlike federal income tax rates, the thresholds for Social Security Taxes are not indexed for inflation.
Over time, inflation forces those who currently do not pay taxes on their benefits to include 50% of their Social Security benefits in their calculations.
How Policy Makers Could Rectify This Issue
Lawmakers could fix this issue by selecting a level below which people do not need to include Social Security benefits in their income and then index that level for inflation.
The policy should be indexed for inflation.
An Argument To End the Tax
On the flip side, there is an argument to be made to end the tax on Social Security benefits.
Reducing or eliminating tax on benefits has seen bipartisan support in Congress. The idea is to allow all seniors to keep their benefits regardless of income tax bracket, which would have an immediate boost in income.
Lawmakers Are Supportive
“It’s a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned,” Rep. Angie Craig (D-Minn) said in a release.
The You Earned It, You Keep It Act is called a “win-win” by its supporters.
Reconsideration Is Needed
Right now, the You Earned It, You Keep It Act, increases the level of those paying taxes to above $250,000 per year, meaning wealthier folks would foot the bill on the taxes for benefits to keep the system running.
As it stands, the bill is not likely to pass with its current wording, but a thoughtful change to Social security benefits is certainly needed.
