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A New Bill Proposes Eliminating Social Security’s Most-Hated Tax. Does It Have Legs?

For the past 22 years, national pollster Gallup has surveyed retirees to gauge their reliance on the income they receive from Social Security. Without fail, between 80% and 90% of respondents every year lean on their Social Security check to cover some portion of their expenses.

Ensuring the financial health of Social Security is of paramount importance to more than 49 million current retired workers, as well as the well over 100 million working Americans who’ll one day be eligible for a monthly benefit.

For some on Capitol Hill, this means a complete overhaul of the program. Prior to being elected president in November 2020, Joe Biden released a four-point plan that outlined major changes to Social Security. His proposal included a reinstatement of the payroll tax on high earners above $400,000, as well as an assortment of changes designed to increase payouts for lifetime low-earning workers and aged beneficiaries (those 78 and above).

However, other lawmakers believe the best way to improve Social Security is to tackle its individual shortcomings head on. That’s exactly what House Rep. Thomas Massie (R-Ky.) aims to do with a recently reintroduced bill.

A pair of glasses and a twenty dollar bill set atop IRS tax forms that have a Social Security card wedged between them.

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This bill would put an end to Social Security’s most-hated tax

In May, Massie and more than two-dozen co-sponsors reintroduced the “Senior Citizens Tax Elimination Act” (officially, H.R. 3206), which would eliminate the federal government’s ability to tax Social Security benefits. This is actually the sixth time Massie has reintroduced this legislation since taking office in 2012.

To stem all misconceptions, Social Security income is taxable at the federal level, and in 12 states, depending on how much an individual or couple earns and is paid from Social Security.

Back in 1983, when Social Security’s asset reserves — its excess cash built up since inception — were running on veritable fumes, Congress passed and then-President Ronald Reagan signed into law the last major overhaul of the Social Security program. Had Congress failed to take action, sweeping benefit cuts would almost certainly have been necessary to sustain payouts.

The Amendments of 1983 introduced a number of permanent changes, including a gradual increase to the full retirement age from 65 to 67, a modest but gradual boost to the payroll tax rate, and the taxation of benefits, which took effect in 1984.

If an individual’s provisional income — gross income, plus tax-free interest, plus one-half of Social Security benefits — surpassed $25,000, up to half of their benefits became taxable at the federal rate. For couples, this figure stood at $32,000.

In 1993, a second tier of taxation was added by the Clinton administration that allowed up to 85% of Social Security benefits to become taxable at the federal rate if an individual’s or couple’s provisional income topped $34,000 or $44,000, respectively.

The idea of taxing Social Security benefits doesn’t sit well with retirees. An informal poll conducted by The Senior Citizens League, a nonpartisan senior issues advocacy group, finds that out of more than 4,900 votes cast to the question, “Should Social Security income be taxed?” 94% have chosen, “No, not at all.”

With the purchasing power of Social Security income on a fairly steady decline since the start of decade, retired workers are feeling cheated out of their benefits via federal and state-level taxation.

To boot, the income thresholds associated with the taxation of benefits have never been adjusted for inflation. The thresholds introduced by the Amendments of 1983 and during the Clinton administration are still valid decades later. As cost-of-living adjustments naturally increase monthly benefits over time, more and more senior households are being taxed on the Social Security benefits they receive.

A couple seated on a couch who are analyzing bills and financial statements on a table in front of them.

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Eliminating the taxation of benefits is a virtually impossible task

While there are plenty of Social Security proposals that a majority of Americans support, such as higher payroll taxation on the wealthy, there isn’t an issue with more lopsided support than the idea of getting rid of the taxation of benefits. But given that Thomas Massie has brought the Senior Citizens Tax Elimination Act to the House floor on six separate occasions over the past decade, the writing is on the wall that this proposal has no traction.

Despite the perceived unfairness of taxing Social Security benefits and failing to adjust the income thresholds for inflation over 30 or more years, two seemingly insurmountable headwinds stand in the way of any bill that addresses this topic.

The biggest issue is that Social Security is facing a funding obligation deficit of an estimated $22.4 trillion over the next 75 years, according to the latest Trustees Report, and therefore needs every dollar it can get.

Although the program brings in 90% of its revenue from the payroll tax on earned income, $48.6 billion in income (4% of total income) derived from the taxation of benefits in 2022. If this source of income were eliminated, the expected depletion of the Old-Age and Survivors Trust Fund’s (OASI) asset reserves would occur even faster than the current projection of 2033. If the OASI’s asset reserves are exhausted, sweeping benefit cuts of up to 23% may be needed to sustain payouts through 2097 without the need for any further reductions.

This is also the reason why efforts to adjust the income thresholds for inflation are going nowhere. If these income thresholds had been properly adjusted for inflation, the annual income from taxing benefits would be much lower. In other words, the OASI’s asset reserves would be exhausted even earlier than the current projection.

The second headwind is that amending Social Security laws will almost certainly require bipartisan support. Amending Social Security laws requires 60 votes in the U.S. Senate, and neither party has held a supermajority of 60 seats in the upper house of Congress since 1979. Getting America’s two major parties to agree on anything, with regard to Social Security reform, has become increasingly difficult over time.

Perhaps the only solace for seniors is that some states have been reducing or eliminating the taxation of Social Security benefits. As of the 2021 tax year, North Dakota stopped taxing Social Security benefits.

Meanwhile, prior to the 2020 tax year, West Virginia had mirrored the federal government’s taxation schedule on Social Security benefits. But as of the 2022 tax year, single individuals earning less than $50,000, and married couples filing jointly below $100,000 in earnings, won’t have their Social Security income exposed to state-level taxation. West Virginia serves as just one example of a taxing state that’s given low-and-middle-income Social Security beneficiaries a break in recent years.

Nevertheless, the federal taxation of Social Security benefits isn’t going anywhere.

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