Inflation and SS Triggers

[Tekward]

Most of us are aware of the upcoming SS CPI adjustment, but I had not considered the other consequences, especially WRT trigger levels. This article provides a nice summary.
"A bigger Social Security benefit translates to higher income, which can mean higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples, according to Johnson. Tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023.“Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees,” Johnson said.


https://money.yahoo.com/social-security-increase-164839728.html

 

[GenXguy]

Yeah, these SS benefits haven't been indexed to inflation since those income levels were set decades ago, so this has been an effective tax increase about every year as there's been a lot of inflation over those decades. I have posted about this in various SS related threads here, such as:

https://www.early-retirement.org/forums/f28/how-is-social-security-taxed-108895-2.html#post2593881

There are COLA increases most years over all these decades which has made a large impact on how much is getting taxed. Not just who, but how much of their SS is taxed at each threshold. COLA increases are not a once-in-a-lifetime adjustment, as was stated at the linked article in OP. And they really add up over the years.

 

[TheWizard]

Fortunately, the increasing amounts of Federal income tax on SS income feeds right back into the SS and Medicare trust funds, per this link:
https://www.ssa.gov/oact/progdata/taxbenefits.html

This is a good thing, helping maintain solvency of those two programs.

Note: 85% of my SS benefit has been taxable from the day I started it and always will be under current law...

 

[GenXguy]

Note: 85% of my SS benefit has been taxable from the day I started it and always will be under current law...

That's the same with many others, but that won't help people who are barely getting by and will get taxed more heavily on their small benefit, which doesn't increase much after Medicare premiums are increased as well.

Also from the article:

For many retirees Social Security is a major part of their income. Nearly 9 out of 10 people aged 65 and older receive a Social Security benefit, according to the SSA. Moreover, Social Security benefits represent about 30% of the income of the elderly. Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income.

So, that's 10% of people 65+ that don't get any SS at all. That's pretty bad. Everyone should get at least some SS benefit, even if they didn't pay into it for 40 quarters.

And it's 90% or more of the income for many other elderly people who actually receive SS: (12% of men, 15% of women)

There are a lot of comments at the bottom of the article.

 

[TheWizard]

SS was never intended to be sufficient for a retiree to live on by itself.
There was a three legged retirement stool concept for a while, now more like a two legged stool for many folks.

Younger people still working need to take this seriously.
Many do, but I guess some just fumble along and end up in retirement poverty...

 

[GenXguy]

SS was never intended to be sufficient for a retiree to live on by itself.

If I could have a dollar for every time someone parroted that same comment, I could retire extra early.

But as I mentioned in my post, there is a reality on the ground where it's 90% or more of many people's retirement. And sadly, some won't even get any SS at all yet won't qualify for other public assistance programs, either, not even getting free Medicare Part A. It's a sad state of affairs out there.

 

[athena53]

Fortunately, the increasing amounts of Federal income tax on SS income feeds right back into the SS and Medicare trust funds, per this link:
https://www.ssa.gov/oact/progdata/taxbenefits.html

This is a good thing, helping maintain solvency of those two programs.

Note: 85% of my SS benefit has been taxable from the day I started it and always will be under current law...

Mine have been, too, and my late husband's before that. BUT- the extra taxes triggered by taxation of SS that do nothing for SS include:

1. State taxes on SS. My state and the neighboring one include the 85% taxable portion of SS into state taxable income.
2. Increased AGI, which reduces deductions such as Medical, which have to be over a certain % of AGI.
3. Increased MAGI (which includes 100% of taxable SS income) triggering IRMAA surcharges, which go to Medicare, not SS.

 

[GenXguy]

3. Increased MAGI (which includes 100% of taxable SS income) triggering IRMAA surcharges, which go to Medicare, not SS.

I know there are different types of MAGI, but when it comes to the ACA, MAGI includes 100% of taxable AND non-taxable SS benefits. So, it's irrelevant how much of the SS is taxable because non-taxable counts as well.

 

[Chuckanut]

Everyone should get at least some SS benefit, even if they didn't pay into it for 40 quarters.

Umm.... No. I must disagree.

As somebody who paid into SS for 40 years, not just 40 quarters, I can assure you that such a thing would be very unfair to the rest of us.

One of the beauties of SS is that everybody who collects has either paid into the system or has a very close relative who did (usually a parent or spouse).

This is getting way off-topic which is inflation. I have said my peace and won't say more.

Speaking of inflation.... Prescription drugs are only up +2.5%. And, even rental car prices are going down -7.7%. Yet, for lower income folks, gas and groceries are still the biggies. GnG are going to make this year's events 'interesting.' What is that supposed Chinese curse - May you live in interesting times ??

 

[TheWizard]

...But as I mentioned in my post, there is a reality on the ground where it's 90% or more of many people's retirement. And sadly, some won't even get any SS at all yet won't qualify for other public assistance programs, either, not even getting free Medicare Part A. It's a sad state of affairs out there.

I have no idea what the typical case history is for those people. Some folks who don't get SS get state pensions of a decent amount.

I suppose some people had major health problems that made working beyond age 40 impossible.

We need an understanding on how elder poverty situations came to be before we can devise a fix...

 

[TheWizard]

Umm.... No. I must disagree.

As somebody who paid into SS for 40 years, not just 40 quarters, I can assure you that such a thing would be very unfair to the rest of us.

One of the beauties of SS is that everybody who collects has either paid into the system or has a very close relative who did (usually a parent or spouse)...

I basically agree.
The SS rules are basically laid out in advance, subject to change at the whim of Congress, of course.

The on-topic good news is: SS is one of the few retirement income streams that is COLAd.
The fact that more of SS will be taxable as time goes on doesn't need to be a big issue.
Lower income retirees might only be in the 12% tax bracket; (I'm in a higher bracket...)

 

[pb4uski]

That's the same with many others, but that won't help people who are barely getting by and will get taxed more heavily on their small benefit, which doesn't increase much after Medicare premiums are increased as well.

Also from the article:
So, that's 10% of people 65+ that don't get any SS at all. That's pretty bad. Everyone should get at least some SS benefit, even if they didn't pay into it for 40 quarters.

And it's 90% or more of the income for many other elderly people who actually receive SS: (12% of men, 15% of women)

There are a lot of comments at the bottom of the article.

Yes, but if SS is 90% of their income then they won't be paying much in federal tax... in 2022 a MFJ couple with solely $100k in SS would have a federal tax of $0.

Add $11k of ordinary income and their SS is 90% of their $111K of income and their tax bill is $555... 0.5% of their $111k of income... nothing to complain about.

If I scale it back to $60k of SS and $7k of ordinary income then their tax bill is nil.... same with $40k of SS and $5k of ordinary income.

Hardly, "heavily taxed".

 

[pb4uski]

If I could have a dollar for every time someone parroted that same comment, I could retire extra early.

But as I mentioned in my post, there is a reality on the ground where it's 90% or more of many people's retirement. And sadly, some won't even get any SS at all yet won't qualify for other public assistance programs, either, not even getting free Medicare Part A. It's a sad state of affairs out there.

I think your sympathy for your friend who is in a unusual circumstance and doesn't qualify for Part A is skewing your views on this issue.

The reality on the ground of some retirees having little in retirement saving and having to rely on SS is because many, particularly of my generation, have been stoopid. They never got the memo that SS was only one leg of a three-legged stool of SS, pensions and personal savings.... and during my career pensions went away and were replaced by 401k/403b and the ilk, so the three legged stool became SS, tax-deferred retirement savings and personal savings... or it became a 2-legged stool.

But too many of my generation lived beyond their means.... some obsecenely so, and lived in McMansions, drove expensive imported cars and took fancy vacations... lived paycheck-to-paycheck and as a result have little in retirement savings and feel it is unfair and want a bailout. Not from me! Remember the story of the Little Red Hen? or the Grasshopper and the Ant? People need to live with the consequences of their decisions.... SS will make sure that they don't starve, which is good.

Many of even modest income lived within their means and since their living expenses are low between SS and a modest amount of savings they will be fine. I have a friend like that... makes about $40k a year and has a duplex where he lives in one unit and rents the other and just a little retirement savings (about $100k I suspect). He is retiring soon and between SS and the duplex rental he should be fine.

Only 4% of the population do not qualify for social security.

• About 4 percent of the aged population never receives Social Security benefits. These never-beneficiaries include higher proportions of women, Hispanics, immigrants, the never-married, and the widowed than the beneficiary population; never-beneficiaries are also comparatively less educated.
• The never-beneficiary poverty rate is 44.3 percent, far higher than the 3.7 percent poverty rate among beneficiaries.
• Almost 95 percent of never-beneficiaries have insufficient work histories to gain Social Security coverage. Within this group we identify three mutually exclusive categories: late-arriving immigrants (55.1 percent), infrequent workers (34.7 percent), and noncovered workers, of whom most are state and local government employees (4.7 percent).
• The high poverty rate among never-beneficiaries is driven by late-arriving immigrants and infrequent workers, who have poverty rates of 43.2 percent and 57.2 percent, respectively. Noncovered workers have a poverty rate of 8.6 percent.
• As indicated by their high poverty rate, late-arriving immigrants and infrequent workers have little income from non–Social Security sources. Infrequent workers are more likely to receive Supplemental Security Income (SSI) than other groups, while late-arriving immigrants are more reliant on coresident income.

 

[N02L84ER]

FYI. I just now used this Federal income tax calculator for a single person with $45,000 of SS and $5,000 of other taxable income (I used interest income). That means 90% of this person's income is from SS. Do you have any idea how much of this person's SS is taxable for a single person?

https://www.mortgagecalculator.org/calcs/1040-calculator.php

According to this calculator, a grand total of $1,250 of SS is taxable bringing their total taxable income to $6,250 which is well under the standard deduction of $12,950. This person would pay $0 federal tax. The people who are hurt tax-wise by the fact that the cutoffs are not adjusted to inflation are not the people who have to rely on SS for 90% of their income.

 

[pb4uski]

^^^ Yup. we crossposted the same thought. But I used https://www.irscalculators.com/tax-calculator

 

[GenXguy]

The people who are hurt tax-wise by the fact that the cutoffs are not adjusted to inflation are not the people who have to rely on SS for 90% of their income.

But the point I was making is that it catches more and more SS dollars above the threshold each year as benefits increase while the thresholds are not indexed. Your example isn't affected yet, but some people are.

 

[GenXguy]

I think your sympathy for your friend who is in a unusual circumstance and doesn't qualify for Part A is skewing your views on this issue.

Well yes, that has enlightened me to a problem more than I would have been otherwise.

 

[GenXguy]

Umm.... No. I must disagree.

As somebody who paid into SS for 40 years, not just 40 quarters, I can assure you that such a thing would be very unfair to the rest of us.

A lot of things are unfair, though. Look at MFJ and child tax credits for well-off people, ACA and Medicaid for millionaires, government pensions, student loan forgiveness, etc. etc.

I've paid into SS for decades also, but I have also paid all the other taxes during that same time period, so it all matters to me. At least some people are actually more needy.

 

[pb4uski]

I'm not sure it is much of a matter of fairness... but warts and all SS is NOT welfare... in order to get benefits you need to have paid in for 40 quarters... it has always been that way and isn't a deep, dark secret. If you are short of credits then get a job for the number of quarters that you need.

IMO very few people would think that you should be able to get SS if you haven't paid in.

 

[athena53]

I know there are different types of MAGI, but when it comes to the ACA, MAGI includes 100% of taxable AND non-taxable SS benefits. So, it's irrelevant how much of the SS is taxable because non-taxable counts as well.

My language wasn't very precise, I guess. I agree with your statement above.

Other reasons people get little or no SS:

For years, clergy could be exempt. My mother had a cousin, a nun who was sent out to teach in the public schools as a lay person, so she could get 40 quarters to qualify for Medicare.

People working off the books.

People (mostly women) who never stayed married more than 10 years and thus couldn't collect spousal and made little or nothing on their own record.

 

[TheWizard]

I'm not sure it is much of a matter of fairness... but warts and all SS is NOT welfare... in order to get benefits you need to have paid in for 40 quarters... it has always been that way and isn't a deep, dark secret. If you are short of credits then get a job for the number of quarters that you need.

IMO very few people would think that you should be able to get SS if you haven't paid in.

Totally agree.
If your retirement income is way too low, then you go on welfare: Supplemental Security Income and Medicaid...

 

[GenXguy]

Totally agree.
If your retirement income is way too low, then you go on welfare: Supplemental Security Income and Medicaid...

Unfortunately, not for some people. I don't want to get into this in this thread, but the 65+ people I mentioned in another thread don't qualify for either of those. Some people get caught in the middle, which isn't good when you're getting no SS and have to pay $1000/mo in Medicare premiums (for one person) because you don't qualify for premium free Medicare Part A, so you have to pay $499/mo extra vs. what most people would pay. And that's with a low income of about $1000/mo before state and federal taxes, so you weren't even able qualify for an ACA marketplace plan in this Medicare expansion state, and expanded Medicare cuts off when you turn 65. Just wanted to get the correct info out there that there are holes in the system.

And my earlier post was just to mention that some ways people are taxed or money is distributed aren't fair. Some people would say the same thing about SS already because of the bend points. It might need to be made a little less fair to prop up the system for the people that most need it. But that's not a prediction - just to clarify.

 

[CRLLS]

IMO, our congress-critters should fix the trigger levels.

I wonder how many of the never-beneficiaries are simply those that have chosen to live off the grid, out of the eye of Uncle Sam. They would be working for cash and never paying into SS.

As an aside, I knew a fellow who emigrated to the US, worked and paid into SS and had earned benefits. He lost his job when the plant closed. The good news was that he was old enough to collect SS. Unfortunately, he had falsified his age decades earlier when coming to the US. As a result, while he was chronologically old enough to collect SS, his records showed he was not. I often wonder if he ever resolved the age issue with the SSA and collected SS or had to find a way to bridge the gap. I imagine this would also have affected his Medicare eligibility.

 

[USGrant1962]

IMO, our congress-critters should fix the trigger levels.

...

Sure they could, but again the income tax on Social Security benefits goes to pay Social Security benefits. It was part of the 1983 fix. If they "fix" the trigger levels the Trust Fund goes bust sooner. So it should be part of the next overall fix to SS.

 

[pb4uski]

...I wonder how many of the never-beneficiaries are simply those that have chosen to live off the grid, out of the eye of Uncle Sam. They would be working for cash and never paying into SS. ...

DW had a friend like that. She hopped from job to job with many of her jobs doing house cleaning and other elder care taking and getting paid cash under the table. Also doesn't save. I've said for years that unless she has her 40 quarters in from her conventional job stints that she'll be in a world of hurt when she is in her 60s. The friend moved away about a decade ago and we lost touch so I'm not sure what is going on with her now.