Why You Pay Social Security Benefit Taxes
I see Jack Woodard almost every Sunday when I pick up my mother at her apartment building. Woodard works at the building one day a week, and for several months, he's been asking me a question I couldn't answer.
"Tell me something," he would say. "Tell me why I have to pay taxes on my Social Security when I've already paid taxes on it."
During the week, Woodard, 73, is an addiction counselor for the Department of Veterans Affairs, and he plans to work two more years so he can collect higher retirement benefits. Then he hopes to move to Honolulu where his daughter and her husband live.
He has been working a long time -- "since I was knee-high to a duck," as he says. At age 9 he was helping bricklayers and other laborers at construction sites operated by his dad, who was a contractor. He has been working ever since and paying taxes on his earnings, including the portion that went into Social Security.
Now he is receiving benefits and paying taxes on a portion of them. "It seems like double jeopardy to me," he says.
Woodard is paying taxes on part of his benefits because of changes made to Social Security in 1983, when politicians were scrambling to make sure the program wouldn't run out of money. The politicians were guided in this quest by a bipartisan national commission headed by Alan Greenspan, who eventually became chairman of the Federal Reserve.
The policy argument was that, while workers paid taxes on the amounts they contributed to Social Security, nobody paid taxes on the amounts their employers put in. The employer received a benefit, however -- a reduction in taxable income equal to the amount contributed. Advocates of the change argued that taxes on that money should be paid when it was received, just as taxes are paid on traditional pension checks.
What became law wasn't pristine policy, however. Instead it was a political compromise designed to exempt lower-income recipients of Social Security from taxes. The rule was written to cover combined income of at least $25,000 or more for an individual and $32,000 for a married couple filing jointly. The figure for combined income was a total of adjusted gross income, interest on tax-exempt bonds and 50 percent of Social Security benefits.
But that figure was never adjusted for inflation, so now many more beneficiaries pay taxes than did originally. In today's dollars, far more people than before exceed the lower income limits. While only 9 percent of Social Security recipients were covered in 1984, 31 percent of beneficiaries will pay taxes on a portion of their benefits in 2007, according to the Social Security Administration. Essentially it's a stealth tax increase. If the floor for taxing benefits had kept up with inflation, only those who make more than $52,331.83 today would be paying taxes.
More people paying taxes on their benefits raises another issue: Who is shouldering the burden of keeping Social Security sound?
Younger workers fret that they will be forced to make sacrifices to protect the retirement of baby boomers.
But baby boomers and their predecessors have taken, or will take, cuts in their benefits to keep Social Security healthy.