Hidden Tax: Means-Testing for Social Security
Means-testing is a system that penalizes richer people’s access to federal welfare.
The Social Security System is an aspect of the welfare state. So, it is subject to means-testing.
Most Americans do not know that there is a means-testing provision for Social Security. It is hidden, but it is real. This is made clear by Prof. Laurence Kotlikoff of Boston University.
First, we pay FICA taxes: “contributions.” Second, we are taxed when we start receiving our checks. Third, people who still have income in retirement pay higher taxes on Social Security income than people who don’t have income — from any source.
Here is Kotlikoff’s assessment.
. . . let me tell you about one of the worst — and I mean worst — provisions in the federal tax law: the taxation of Social Security benefits. I’m not complaining about taxing the benefits, per se; rather, the simply insane and egregiously unfair way in which it’s done.The taxation of our Social Security benefits is so complicated that it, in effect, requires its own tax return, as the 30-page, single-spaced instructions form with its 4 worksheets makes clear.
I’ve reverted to ranting again. Sorry, I’ll now stick to the facts.
First, Social Security benefits are subject to federal income taxation if a modified measure of our pre-tax income, called adjusted gross income (AGI) exceeds a certain threshold. Modified AGI (MAGI) includes half your Social Security benefits. If MAGI exceeds these lower thresholds — $25,000 for singles and $32,000 for marrieds, but is below these upper thresholds — $34,000 for singles and $44,000 for marrieds, up to half of your benefits will be subject to federal income taxation. But if your MAGI exceeds the relevant upper threshold, up to 85 percent of your benefits will be taxed.
Whereas virtually all other provisions of the federal income tax are indexed to inflation, these thresholds are not. Hence, over time, as Social Security benefits are adjusted for inflation, you can find yourself paying taxes on more and more of your benefits. Moreover, all our kids can expect to pay taxes on 85 percent of their benefits due to this form of bracket creep. And this will be true even if our kids’ incomes in retirement consist solely of their Social Security benefits.
In short, “soak the rich.” It’s their fair share. “Don’t tax you. Don’t tax me. Tax the man behind the tree.”
Continue reading on pbs.org.
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Published on April 17, 2013. The original is here.