By Martha M. Hamilton
Sunday, November 4, 2007

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.

The cuts aren't just the result of the creeping taxation of benefits, said Nancy J. Altman, an assistant to Greenspan on the Social Security commission and author of an excellent book, "The Battle for Social Security: From FDR's Vision to Bush's Gamble." The 1983 act also raised the age of Social Security eligibility, which basically reduces across the board the amount of benefits retirees receive. As of 2000, if you were born in 1937 or earlier, your full retirement age for Social Security is 65. After that it increases to 66 for those born from 1943 to 1954, and rises again gradually to 67 for those born in 1960 and later. You can start taking benefits earlier than your full retirement age, but that reduces the monthly amount you receive.

The higher eligibility age results in reducing the percentage of wages replaced by Social Security benefits, Altman said. According to calculations she cites in a presentation to be delivered later this month, Social Security replaced 55.5 percent of the wages of a low-income worker in 2000 but will replace only 49 percent by 2030. The replacement rate for a medium-income worker drops to 36.3 percent from 41.2 percent, and for a high-income worker it drops to 24 percent from 27.3 percent. At the same time, Medicare premiums are taking a bigger bite out of Social Security payments.

Also, a substantial percentage of baby boomers got caught in the changeover in pension plans, leaving them with neither a traditional pension that pays out for life nor adequate retirement savings. Savings plans, such as 401(k)s, are only 25 years old, and many companies didn't offer them until years later. I often hear from workers who didn't have a savings plan available to them until they were in their 40s or 50s.

It's much easier (though not easy) to save enough if you start at age 25.

So let's drop the unproductive generational back-and-forth. We all have to do our part to keep Social Security sound.

And by the way, kids, those baby boomers are your parents, so you have a stake in protecting them in old age.

If not, they're moving in with you.

Martha M. Hamilton's e-mail address ishamiltonmartha@washpost.com