Rep. Angie Craig and Others Try to End Double Taxation on Social Security Income

With alarm bells ringing regularly over Social Security solvency, lawmakers are coming forward with a series of proposals aimed at avoiding potentially unavoidable benefit cuts.

One of the newest ideas — an account from Representative Angie Craig, a Democrat from Minnesota — would bring extra money into the system by making higher earners bear payroll taxes on a larger portion of their income, while also eliminating what some argue is double taxation of income for Social Security purposes . The net effect would be to get more money from those who presumably can afford it the most, while providing greater benefits to those most dependent on Social Security.

Craig’s “You Earned it, You Keep It Act,” introduced in August, would repeal all federal taxes on Social Security benefits beginning in 2023. Individual filers now owe some federal taxes on Social Security benefits if they get a “combined income” — a designation that takes into account adjusted gross income, non-taxable interest, and Social Security benefits — of $25,000 or more. Joint filers are owed if they have a combined income of $32,000 or more. Twelve states, including Colorado, Connecticut and New Mexico, levy their own taxes on the benefits.

Aspiring reformers have long noted that these limits have not been adjusted for inflation since they were introduced in the 1980s. Because they are set so low, they force a majority of Social Security recipients to repay at least some of the benefits that many consider too meager. Any money the federal government loses from abolishing taxes would be offset by transfers from a treasury known as “America’s checkbook,” which holds collected tax money to fund operations of the United States government.

Nancy Altman, president of the nonprofit Social Security Works, said benefits taxes are known as “deeply unpopular with the American people.” Many see the system as resulting in “double taxation,” she added, because many employees’ earnings are taxed once in the form of payroll taxes and then a second time when they receive Social Security benefits.

“Most people on Social Security benefits already have quite a low income,” Altman said. “And more and more people have to pay those taxes because the thresholds aren’t indexed.”

The second part of the bill would require high earners to pay payroll taxes on income of $250,000 or more per year. Current law prevents payroll taxes from being applied to annual incomes above $147,000.

If Craig’s bill became law, there would still be a… window for earnings between $147,000 and $250,000 in which payroll taxes do not apply. But since the lower bound is adjusted upwards in line with the average annual wage growth, while the upper bound remains the same, that window would steadily shrink until it disappears in about 20 years.

In a letter to Craig, the Social Security chief actuary’s office estimates that the proposed changes would extend the solvency of the Social Security trust fund through 2060. % of their current level.

Other proposals would use similar means to achieve more or less the same goal. One of the most prominent, from Social Security Subcommittee Chairman Rep. John Larson, a Connecticut Democrat, would subject income of $400,000 or more to payroll taxes. Sadly, Marc Goldwein, senior vice president and senior policy director at the Committee on a Responsible Federal Budget, said, revisions to the original version of Larson .’s account have increased the promised distributions in such a way that the fund would become less stable in the long term.

Each of these proposals faces the usual political hurdles. But even if adoption were likely, there are practical objections.

Leibel Sternbach, a financial advisor with expertise in Social Security, said critics of the current system too often forget that the amount of Social Security benefits retirees and others receive is directly related to how much they have benefited from the system over the years. paid . So the more high earners have to put in, the more they can withdraw when they retire.

“It’s not a welfare program,” he said. “So if you raise that limit, you’re just paying more in benefits.”

As for Craig’s proposal, Sternbach sees it as nothing more than an attempt to win votes from retirees. Any real solution, he said, will most likely have to be a combination of postponing retirement age, taxing different retirement accounts more and cutting certain benefits.

Congress will do its best not to do anything that harms current recipients for fear of retaliation at election time, Sternbach said. Any pain will most likely be felt by employees who are currently too young or too busy to worry about retirement.

Sternbach said financial planners play an important role in forecasting likely changes in Social Security and in helping younger customers find ways to offset any losses arising from the need to strengthen the system.

“You have to be considerate, rather than continue with just the default, or else you’ll play into their hands and you probably won’t get out,” he said.

Mike Zeiter, owner of Foundations Financial Planning in Carthage, Missouri, said he understands why so many people question the reasons for taxing Social Security benefits. Since employees’ earnings are already taxed once to deposit into the Social Security Fund, why would they be taxed a second time when they are retired?

Yet another criticism, Zeiter said, is that retirees would be better off in the long run if they were allowed to invest their savings in retirement accounts rather than being forced to pay them to Social Security.

Regardless of the solution, Altman said one thing is hardly questionable. Congress will eventually act to strengthen Social Security. The program is too popular and essential to the lives of too many voters for politicians to risk their careers over welfare cuts and broken promises.

“There’s no question, they’re never going to let it go bankrupt,” Altman said. “And there’s still plenty of time. Insolvency is still more than a decade away.”

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