It’s time to get rid of Social Security’s not-so-hidden tax

"The Social Security tax is a scandal sitting in plain sight. It is a stealth tax levied on middle-income seniors that was not supposed to hit them. And it is an egregious example of double taxation, because the people paying tax on the benefits also paid tax on the money they put into the system..."

https://www.marketwatch.com/story/its-time-to-get-rid-of-social-securitys-not-so-hidden-tax-11645646524?siteid=yhoof2

Young seniors are retiring in droves.  Employers can't find workers. The tax on Social Security benefits provides a disincentive to work.

Wouldn't it be a great policy and political coup for Biden to propose raising the cap  before SSN is taxed or eliminating it altogether?  Eliminate the disincentive and draw some seniors back into at least part-time work?

Would seem it could appeal to lots of independent voters as well. Older Republican Never-Trumpers too.

I wonder if even Republicans would support this?

(I am about to start SS.)

drummerboy said:

I wonder if even Republicans would support this?

(I am about to start SS.)

Yep. Anything to lower taxes for the Rs.

jimmurphy said:

Yep. Anything to lower taxes for the Rs.

I dunno - Sen. Scott just proposed raising taxes.

As I sometimes sarcastically say, the American Dream is to become wealthy enough to benefit from Republican tax cuts.

Here, we pay taxes on social security payments too - but people mostly get them back, either as direct rebates at the end/beginning of the the financial year (income tax time) or via universal health care, medicines safety net (hit the limit and then most of your prescribed drugs are free or maybe $2), and various other support programs that are free/ low cost. (Concessional transport, home support etc)

I gather, after all these years on MOL, your support systems don’t work the same way…

Yet another proposal to help boomers today at the expense of everyone else tomorrow.  Just stop, please.  

DanDietrich said:

Yet another proposal to help boomers today at the expense of everyone else tomorrow.  Just stop, please.  

It's double-taxation. And disincentives work when workers are in short supply. 

And guess what happens when seniors work?  They pay Social Security tax on their wages, which support the next generation of workers, AKA everyone else.

I disagree and don't care to stop, but thanks. 

I agree that any thresholds that aren't indexed for inflation are terrible idea.  So I'm in favor of revising it to bring it in line with what was intended when it was passed.

but the notion that lots of people of Social Security age want to work and aren't because they will pay tax on their benefits seems doubtful.  The type of jobs employers can't fill tend to be crappy jobs for crappy pay where workers don't get treated well by customers or management.  Are there a lot of 70 year olds who want to work the front desk at a motel, in an Amazon warehouse, or be a wait person at Applebee's?  

ml1 said:

I agree that any thresholds that aren't indexed for inflation are terrible idea.  So I'm in favor of revising it to bring it in line with what was intended when it was passed.

but the notion that lots of people of Social Security age want to work and aren't because they will pay tax on their benefits seems doubtful.  The type of jobs employers can't fill tend to be crappy jobs for crappy pay where workers don't get treated well by customers or management.  Are there a lot of 70 year olds who want to work the front desk at a motel, in an Amazon warehouse, or be a wait person at Applebee's?  

Nope, but those who retired earlier than they otherwise would have as a result of the pandemic might want to work from 62 though 70. Especially 62-65 when they might get health insurance and Medicare hasn't kicked in yet.

ml1 said:

Are there a lot of 70 year olds who want to work the front desk at a motel, in an Amazon warehouse, or be a wait person at Applebee's?  

There are precisely two: my in-laws in Tennessee, who worked in an Amazon warehouse in their 70s because they wanted to see what it was like.

jimmurphy said:

ml1 said:

I agree that any thresholds that aren't indexed for inflation are terrible idea.  So I'm in favor of revising it to bring it in line with what was intended when it was passed.

but the notion that lots of people of Social Security age want to work and aren't because they will pay tax on their benefits seems doubtful.  The type of jobs employers can't fill tend to be crappy jobs for crappy pay where workers don't get treated well by customers or management.  Are there a lot of 70 year olds who want to work the front desk at a motel, in an Amazon warehouse, or be a wait person at Applebee's?  

Nope, but those who retired earlier than they otherwise would have as a result of the pandemic might want to work from 62 though 70. Especially 62-65 when they might get health insurance and Medicare hasn't kicked in yet.

I agree with the premise that the threshold is too low as a result of inflation.  But are people who need to work to get health insurance not taking jobs that would be offered to them because they would pay more income tax?  

I think the threshold on taxing benefits is too low, but is it really that much of a disincentive to work? Is there any survey data among retirees that suggests a lot of them are refusing a job because of taxes? As long as people want to work and they net out ahead on income and benefits doesn't it make sense to work and pay the tax?

I'm just a little skeptical of articles like that one which don't give any figures for how many people would work if this tax were changed.  And it also doesn't give any examples of how much the tax actually is in absolute dollars.  Saying 85% of benefits are taxed sounds outrageous of course.  But how much in absolute terms is the hypothetical person he cites who makes $34,000 a year paying in tax?  There are probably disincentives for people who go a few dollars over the $34K threshold.  But if a person grosses $50K for example, do they net out ahead of where they'd be if they didn't take a job?

Like I said, raising the threshold makes perfect sense but for me that article isn't convincing me that millions of retirees are sitting out the job market because of the tax.

DaveSchmidt said:

There are precisely two: my in-laws in Tennessee, who worked in an Amazon warehouse in their 70s because they wanted to see what it was like.

sounds like the possibility of paying additional income tax wasn't much of a disincentive for them.

ml1 said:

sounds like the possibility of paying additional income tax wasn't much of a disincentive for them.

They were thisclose to deciding not to do it.

ml1 said:

I agree with the premise that the threshold is too low as a result of inflation.  But are people who need to work to get health insurance not taking jobs that would be offered to them because they would pay more income tax?  

I think the threshold on taxing benefits is too low, but is it really that much of a disincentive to work? Is there any survey data among retirees that suggests a lot of them are refusing a job because of taxes? As long as people want to work and they net out ahead on income and benefits doesn't it make sense to work and pay the tax?

I'm just a little skeptical of articles like that one which don't give any figures for how many people would work if this tax were changed.  And it also doesn't give any examples of how much the tax actually is in absolute dollars.  Saying 85% of benefits are taxed sounds outrageous of course.  But how much in absolute terms is the hypothetical person he cites who makes $34,000 a year paying in tax?  There are probably disincentives for people who go a few dollars over the $34K threshold.  But if a person grosses $50K for example, do they net out ahead of where they'd be if they didn't take a job?

Like I said, raising the threshold makes perfect sense but for me that article isn't convincing me that millions of retirees are sitting out the job market because of the tax.

I understand your position, but wonder why they should be taxed at all. They were not from inception until 1984. It is clear double-taxation, which I am philosophically against, with the exception of the estate tax.

And while I can't cite stats and don't care to do the research, I think you underestimate the disincentive.  

Lots of people retired earlier than planned due to the pandemic. If they were perhaps not as well-off as yourself and now need to live on a reduced benefit at 62, the thought of taking a low-paying job for which you don't even net the low pay because some of your social security money will evaporate seems like a pretty big disincentive to me.

I can't believe taxes have anything to do with a person's decision to work or not, assuming they can find a job.

jimmurphy said:

ml1 said:

I agree with the premise that the threshold is too low as a result of inflation.  But are people who need to work to get health insurance not taking jobs that would be offered to them because they would pay more income tax?  

I think the threshold on taxing benefits is too low, but is it really that much of a disincentive to work? Is there any survey data among retirees that suggests a lot of them are refusing a job because of taxes? As long as people want to work and they net out ahead on income and benefits doesn't it make sense to work and pay the tax?

I'm just a little skeptical of articles like that one which don't give any figures for how many people would work if this tax were changed.  And it also doesn't give any examples of how much the tax actually is in absolute dollars.  Saying 85% of benefits are taxed sounds outrageous of course.  But how much in absolute terms is the hypothetical person he cites who makes $34,000 a year paying in tax?  There are probably disincentives for people who go a few dollars over the $34K threshold.  But if a person grosses $50K for example, do they net out ahead of where they'd be if they didn't take a job?

Like I said, raising the threshold makes perfect sense but for me that article isn't convincing me that millions of retirees are sitting out the job market because of the tax.

I understand your position, but wonder why they should be taxed at all. They were not from inception until 1984. It is clear double-taxation, which I am philosophically against, with the exception of the estate tax.

And while I can't cite stats and don't care to do the research, I think you underestimate the disincentive.  

Lots of people retired earlier than planned due to the pandemic. If they were perhaps not as well-off as yourself and now need to live on a reduced benefit at 62, the thought of taking a low-paying job for which you don't even net the low pay because some of your social security money will evaporate seems like a pretty big disincentive to me.

I did a quick google search on some of the relevant info, and by my back of the envelope calculation, if you retired at 62 the maximum SS benefit you get is roughly $28K per year if you are single.  That's a 12% tax bracket.  The first dollar you earn apparently kicks in income tax at 50% of the 28K.  And that's about $1700.  Even if a person lives in Alabama, with its paltry $7.25 minimum wage, they start to break even on the tax at 5 hours a week of employment.

Unless all my info is wrong, a person in NJ for instance with a $13 minimum wage is ahead of the game pretty much right from the start, especially if they are working to get health insurance.

Even if that person goes one dollar over the $34K threshold resulting in 85% of the benefits taxed, they pay about $3K in tax on the $6K they earned.  

I agree that the threshold is way too low.  Someone making $34K a year shouldn't be subject to that much tax. And if a person is only going to earn $7K or $8K a year on top of their SS, there probably really is a disincentive to work.

But I'm just not convinced it's a disincentive for someone who can easily find a full time job and wants to work.

and we can agree to disagree on the double taxation issue I guess.  Our money is taxed multiple times if we think about it.  I pay federal and state withholding before I ever see a dollar of my salary.  And then from that already taxed money I pay property taxes, sales taxes, excise taxes, etc. etc.  Lots of transfers of money are taxed. 

DaveSchmidt said:

ml1 said:

sounds like the possibility of paying additional income tax wasn't much of a disincentive for them.

They were thisclose to deciding not to do it.

thisclose counts in horseshoes, hand grenades but not working in Amazon warehouses.

ml1 said:

and we can agree to disagree on the double taxation issue I guess.  Our money is taxed multiple times if we think about it.  I pay federal and state withholding before I ever see a dollar of my salary.  And then from that already taxed money I pay property taxes, sales taxes, excise taxes, etc. etc.  Lots of transfers of money are taxed. 

Fair enough on agreeing to disagree. State taxes etc are not double taxation, they are just taxes from different entities that add up to the total take in taxes.  The Feds could easily raise the rate and then dole out the money to the states and you wouldn't call that double taxation.

A little background on why SS benefits started to be taxed at all: https://dissidentvoice.org/2015/06/greenspan-finally-tells-the-awful-truth-about-social-security/

All part of the shell game.

jimmurphy said:

ml1 said:

and we can agree to disagree on the double taxation issue I guess.  Our money is taxed multiple times if we think about it.  I pay federal and state withholding before I ever see a dollar of my salary.  And then from that already taxed money I pay property taxes, sales taxes, excise taxes, etc. etc.  Lots of transfers of money are taxed. 

Fair enough on agreeing to disagree. State taxes etc are not double taxation, they are just taxes from different entities that add up to the total take in taxes.  The Feds could easily raise the rate and then dole out the money to the states and you wouldn't call that double taxation.

A little background on why SS benefits started to be taxed at all: https://dissidentvoice.org/2015/06/greenspan-finally-tells-the-awful-truth-about-social-security/

All part of the shell game.

that's a separate argument and I'm with you on that.  For a long time I've been convinced SS taxes should be abolished, and the benefits should be paid out of the general fund.  The SS taxes hit low income people pretty hard, and if the funds it generates aren't going into a separate account, it's just an illusion to fool people that this fairly regressive tax is in their benefit.  When it's not.  

It's also IMHO a justification for taxing benefits of wealthier retirees.  And that's one part of the original article I find disingenuous.  Of the many billions collected from the half of retirees who earn above the threshold, how much is paid by upper middle class people in much higher tax brackets than the retiree who earns $34K?  Probably the vast bulk of it.  Like so many such proposals, the vast bulk of the benefit of eliminating taxes on SS benefits would go to wealthier people.  So raise it to an $80K threshold, index to inflation from here forward and be done with it.  But trying to tell us that poor working class people are disincentivized to work as cover for a tax break mainly going to wealthy retirees with investments isn't super convincing to me.

We can agree on a lot there. But if we can’t agree on the double taxation issue then I’m not sure there’s much more to discuss.

And hopefully this goes without saying based on my prior postings in general, but I’d be in favor of raising marginal income and capital gains tax rates on the higher brackets to make up the difference in eliminating the tax on social security benefits.

And then some.

conceptually I don't get why this is double taxation.  the second article you posted describes the process as -- we pay SS taxes into the general revenue fund.  Then years later we are paid SS benefits from the general revenue fund.  It's not as though we paid tax into a fund with our names on it, and the same funds are disbursed to us years later.  

if that's double taxation, there are a lot of other examples.  If your only income is SS benefits and you buy stuff with a federal excise tax on it, is that double taxation?  

I'll confess, I hear the term double taxation all the time, (usually with regard to the estate tax) and I just don't understand why it's so objectionable to pay tax on money and then be taxed again in a different transaction on the money that remains.

ml1 said:

conceptually I don't get why this is double taxation.  the second article you posted describes the process as -- we pay SS taxes into the general revenue fund.  Then years later we are paid SS benefits from the general revenue fund.  It's not as though we paid tax into a fund with our names on it, and the same funds are disbursed to us years later.  

if that's double taxation, there are a lot of other examples.  If your only income is SS benefits and you buy stuff with a federal excise tax on it, is that double taxation?  

I'll confess, I hear the term double taxation all the time, (usually with regard to the estate tax) and I just don't understand why it's so objectionable to pay tax on money and then be taxed again in a different transaction on the money that remains.

Being taxed on money that remains like State taxes or excise taxes is not double taxation. It's separate tax for a different purpose.

Think of a regular 401k.  You deduct pretax income and do not pay Federal tax on that income.  Then when you draw down the money, you pay Federal tax.  The income is taxed once. Single Taxation.

Social Security was originally set up as a separate Trust Fund until they messed with it. It was envisioned more like an investment vehicle. Think of it like a Roth 401k. You pay Social Security tax (taxed once) and then that money sits in the trust fund (and is used to pay retirees), with a set return at the end which is paid out to you and until 1983 was not taxed again. Single taxation.

Since 1983 that set return might be taxed again if you earn enough from other sources or investments. Double Taxation.

It's now all set up to obfuscate things to lower marginal income and Cap Gains rates for the rich, and as you correctly point out, it falls squarely on the backs of those less well-off.

ml1 said:

conceptually I don't get why this is double taxation.  the second article you posted describes the process as -- we pay SS taxes into the general revenue fund.  Then years later we are paid SS benefits from the general revenue fund.  It's not as though we paid tax into a fund with our names on it, and the same funds are disbursed to us years later.  

if that's double taxation, there are a lot of other examples.  If your only income is SS benefits and you buy stuff with a federal excise tax on it, is that double taxation?  

I'll confess, I hear the term double taxation all the time, (usually with regard to the estate tax) and I just don't understand why it's so objectionable to pay tax on money and then be taxed again in a different transaction on the money that remains.

Funds paid into SS are subject to both US federal income tax and SS tax when forcibly contributed to SS from wages.  Returning same funds to SS recipient as an old age benefit and then subjecting this SS benefit to US federal income tax means the same funds have been subject to US federal income tax twice. State and local income taxes, property tax, and excise taxes are NOT the US federal income tax.

PS 401k contributions from wages are generally not subject to US federal income taxation upon contribution.  But 401k withdrawals are subject to US federal income taxation.  Tangentially, dividends and interest received are generally not treated as earned income and thus such interest and dividends are generally not subject to SS tax (but are subject to US federal income tax).

I don't have any strong philosophical stance on double taxation, but reducing taxes on non-plutocrats for a popular program seems like a political winner to me. I didn't quite understand DanDietrich's objection - is the concern that there would not be sufficient funds to cover ss payouts? If so, I'd say just MMT that and allocate the funds -- raise some other taxes if we're worried about offsetting the loss of tax revenue.

PVW said:

I don't have any strong philosophical stance on double taxation, but reducing taxes on non-plutocrats for a popular program seems like a political winner to me. I didn't quite understand DanDietrich's objection - is the concern that there would not be sufficient funds to cover ss payouts? If so, I'd say just MMT that and allocate the funds -- raise some other taxes if we're worried about offsetting the loss of tax revenue.

I think that Dan’s objection is similar to ml1’s - that eliminating or raising the cap helps the wealthier who don’t need help. 

But it absolutely is good politics to get rid of the tax. And I really do believe that it is a disincentive.

And like you, I’m not looking at this in a vacuum. Raise other taxes to offset.  

jimmurphy said:

PVW said:

I don't have any strong philosophical stance on double taxation, but reducing taxes on non-plutocrats for a popular program seems like a political winner to me. I didn't quite understand DanDietrich's objection - is the concern that there would not be sufficient funds to cover ss payouts? If so, I'd say just MMT that and allocate the funds -- raise some other taxes if we're worried about offsetting the loss of tax revenue.

I think that Dan’s objection is similar to ml1’s - that eliminating or raising the cap helps the wealthier who don’t need help. 

But it absolutely is good politics to get rid of the tax. And I really do believe that it is a disincentive.

And like you, I’m not looking at this in a vacuum. Raise other taxes to offset.  

on balance (leaving aside the term double taxation), I'm with you on the larger issue.  I think these stealthy tax increases are bad policy and generally unfair.  Get rid of the SS tax altogether, don't tax benefits, and be more transparent by raising marginal rates and taxes on gains on the people in the upper quintile (or two quintiles if need be).

and isn't it refreshing to have a discussion with some disagreement, actual facts being exchanged, finding a lot of common ground, and nobody insults anyone.  or throws out a straw man or misdirection.

it's almost like we're in person and not on the internet ;-)