Social Security benefits replace about 40% of pre-retirement income and are lower than many retirees anticipate they will be.
Unfortunately, the problem with benefits being too low to live on is compounded by the fact that around half of all retirees may not get to keep the full payments they receive from the Social Security Administration.
Why do so many retirees lose part of the retirement checks they earned by working and paying into Social Security over the course of their careers? It's simple: The federal government may take a cut of the money.
A shocking number of seniors will lose part of their Social Security benefits in 2022
According to The Senior Citizens League, most retirees don't expect their Social Security benefits will be taxed. In fact, 51% of respondents to a national survey said they expected to pay no tax on their benefits at all, while fewer than 25% reported that they knew the government would definitely claim a piece of their payments.
Sadly, far more than a quarter of older Americans could find themselves facing an IRS bill — and this could cause major financial problems if unexpected.
Just how many retirees will be taxed? According to The Senior Citizens League, close to half of all households may owe the IRS money on their Social Security income in 2022, and 47% of seniors reported having to pay last year. Data from the Social Security Administration also suggests as many as 56% of seniors could face a tax bill in the coming years, up from just 10% of senior households that originally owed when taxes on benefits were first introduced.
This big increase in retirees who owe money to the IRS means more older Americans will be left with less money to cover their medical care, housing, and other crucial expenses. Many of these seniors may not expect to take this hit. And things are likely to get worse over time.
Why are a growing number of seniors losing Social Security income?
The number of retirees losing part of their Social Security benefits has gone up from just 10% to close to half of all older households because of how taxation of benefits works.
Amendments to Social Security in 1983 introduced the first tax on benefits, with the goal of shoring up the entitlement program. The money collected doesn't go into the general revenue fund but rather is used to support Social Security directly. And back in the 1980s, when the law was changed to put these taxes in place, benefits became taxable only after provisional income reached a specific level.
At the time of this change, up to 50% of benefits could be taxed once provisional income reached $25,000 for single tax filers or $32,000 for joint filers. Provisional income is half of Social Security income, all taxable income, and some nontaxable income. Then, in 1993, legislation was passed to extend taxation of benefits so that up to 85% of them were subject to it once provisional income hit $34,000 for single filers or $44,000 for married joint filers.
Now, decades later, those thresholds at which benefits become taxed remain the same. They aren't indexed to inflation, unlike many aspects of Social Security, even though incomes (and the prices of goods and services) go up each year. The result is that more seniors end up with taxable benefits every year, and already close to half don't get to keep all their retirement money.
Future retirees are even more likely to owe benefits than older Americans today, and this added expense needs to be considered when making retirement plans because it means you'll need more savings to supplement the money your retirement income provides.
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