Should Social Security be taxed?
About a third of Social Security recipients pay federal income tax on a portion of their benefits. Is that fair?
This post comes from Jim Wang at partner blog Bargaineering.
After a post a few weeks ago about reading your Social Security statement, reader "J. Shoe" asked the following question:
Just trying to find out if it is true that any Social Security benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and is there a link to see this horrific scam? It's bad enough they borrow from SS without the intention of paying it back, but this crazy.
I don't see how it's crazy, but I also didn't fully understand how Social Security benefits are taxed. For more information, I turned to Publication 915: Social Security and Equivalent Railroad Retirement Benefits (.pdf file), which is the IRS document that explains everything.
Are your benefits taxable?
Add up all the benefits you received, which is in Box 5 of your Form SSA-1099. Take half of that amount and add it to your taxable pensions, wages, interest, dividends and other taxable income. Then add any tax-exempt interest income, such as from municipal bonds or savings bonds. (Post continues below.)
Now compare that number with the base amount for your filing status (these are 2011 figures):
- Single, head of household, or qualifying widow(er) -- $25,000.
- Married filing jointly -- $32,000.
- Married filing separately (living apart) -- $25,000.
- Married filing separately (living together at any time during the year) -- $0.
If your total is less than the base amount for your filing status, you are not taxed on any portion of your benefits. If your number is more than the base figure, you'll be taxed on up to 50% of your benefits. If your base number is greater by a significant amount -- $9,000 more for single, head of household and qualifying widow(er) or $12,000 more for married filing jointly -- then you'll be taxed on up to 85% of your benefits.
The Social Security Administration says that about a third of recipients pay federal income tax on a portion of their benefits.
Should Social Security benefits be taxed?
I don't think so. When you make (forced) contributions, those amounts are deducted from your income but you still pay income taxes on them. When you get disbursements from the SSA, you can be taxed on up to 85% of your benefits, which means you're getting a 15% discount, but it's on contributions that were already taxed when you made them.
It's a little messy because you get more out of Social Security than you put in, but you were taxed going in, so should you be taxed going out? It's like making a contribution to a Roth IRA and then being taxed on the back end too.
More on Bargaineering and MSN Money:
The Social Security pamphlet of 1936 read, "Beginning November 24, 1936, the United States Government will set up a Social Security account for you. ... The checks will come to you as a right." (http://www.ssa.gov/history/ssb36.html). Americans were led to believe that Social Security was like a retirement account and that money placed in it was, in fact, their property. Shortly after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis (1937). The court held that Social Security was not an insurance program, saying, "The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way." In a 1960 case, Flemming v. Nestor, the Supreme Court said, "To engraft upon Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands." ~ Walter Williams.
The lies have not been a secret, we've been trying to tell you people for years.
No. The government has embezzleded our savings and now they double tax to make up their thievery.
This money has been taxed one time already and you don't get to use it for many years. Why should it be taxed again if you live long enough to draw it? Aren't we paying enough sales taxes on SS payments when we have to buy stuff just to live?
Come on, just cut lots of the really unnecessary spending in government like you politicians always promise and things will get much better. ( probably would get you reelected without having to BS your way back in ) Tell the truth and you won't have to remember your lies.
Mea Culpa, I forgot to mention a recent article that pointed out that during the Reagan administration, the SS income cap was adjusted, and it was projected that the SS fund would be solvent well into the future. Unfortunately, that projection was based on the assumption that future growth in workers' income would continue. Well, guess what? It hasn't. Jobs have been shipped overseas, and much of the income that used to go to the MIddle Class is now going to the Upper Class, where it is not subject to SS tax due to the income cap, so the Reagan-era projections are falling well short of where they should be. To me, this is a valid reason to increase the income cap and get that money back into the SS fund, as the people working for Reagan had projected (one of those people was named Paul Volcker, you may have heard of him)..
Big Show: I began working and drawing a check subject to payroll tax in 1963 at age 18, out of high school, courtesy of the US Air Force, so I have now worked 49 years and paid in over $110K in SS tax. It was supposed to have been invested in government securities, and if it had returned just 4% compounded annually (not unreasonable, I have EE bonds at 4%), that would be a growth factor of 6.83. Given an average investment of $55K (1/2 of my $110K), I would have a balance of over $375K. I've read the average SS benefit is around $21,600/yr. If I begin taking my benefit at full retire age (not 62), with the remaining balance continuing to earn 4% growth, I would be 93 or older before it would be used up and I would need help from other peoples' payroll tax. (I set up an Excel spreadsheet and worked it out). What are the odds I will live to 93 or more? In spite of increased longevity, most people will not make 93 and therefore not collect what they should. Today's problem with the SS fund is primarily due to Congress as we all know, not longevity.
I have no problem with increasing the retirement age for younger workers given the increase in longevity.
I also think the income cap could be raised or eliminated, as with Medicare taxes, and provide significantly more funds, SS is a regressive tax as it is:
1. A nurse or mechanic making $40K/yr pays 6.2%
2. A corporate manager making $400K/yr pays 1.7%
3. A mediocre ballplayer making $5Meg/yr pays .14% (that's POINT 14%)
4. A hedge fund manager (the key word is "manager", not "investor") making $20Meg
or more per year pays 0%
I sincerely doubt that the wealthy who now control Congress will allow any significant change to the cap. However, should that come to pass, I would not support means testing, simply because in all sense of fairness, people should be able to benefit in proportion to what they contribute, and why penalize those who have been responsible in their working careers, passing up the new cars and cruises, and put that money into 401Ks or IRAs instead.
I remember hearing during the primaries about SS being a Ponzi scheme. When SS was originally set up the average life expectancy was around 55 years old. The benefits were not set to be dispersed until age 65. The intent was to provide benefits only to those who live significantly beyond their working years. Now that the average life expectancy is approaching 80 and the benefits are only now being moved upward towards 68 over the next couple of decades, it is little wonder that it is going broke. I am not a fan of taxes but I do understand their necessity and need to limit them.
In my estimation, they have become excessive relative to our expectation of production (growth of private industry). It has been understood for years by the federal government (primarily, but not limited to, the Legislative Branch) that control of money constitutes control of people. We the people are just now starting to see this culmination of 40+ years of government growth (Great Society of the 1960's). We are at a cross roads as to whether we will have a limited government or largess government.
The only way to truly limit taxes is to limit the ability of the government to spend money. Limited spending authority results in limited control and limited taxes. The federal government would then need to set priorities and optimistically, there may even be be a limited effort to cut some administrative costs.
Clarification: My previous non-profit analogy of 20% administrative fees was interpreted as misleading. SS spent over $6.5 Billion in administrative fees in 2010 and $3.5 Billion in Disability Insurance administrative fees in 2010. Ezra Klein with Washington Post stated, "the main Social Security program are 0.6 percent of expenditures. The disability insurance program clocks in a bit higher: 2.3 percent" for those that are interested.
If they want to tax your benefits, why don't they just reduce them instead? To give it to you and take it back is absurd.
Taxing going in, and taxing going out. Well, they tax taxes all the time. For example, you buy a bottle of liquor at the state store (or whatever they have in your state). The majority of the sticker price of that bottle is alcohol excise tax. But you pay a sales tax on the sticker price, not the pre-excise tax cost of the bottle. So they are taxing the tax. That's just one example, they tax taxes all the time. That is absurd.
Omg give is a break already were all tired of tax and being taxed were already paying for it, no need to pay for it twice, Its like taxing a horse at both end,
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