Here is a research report regarding the history of the imposition of taxes on social security. The 1979 Advisory Council said the numbers were actually 17% and 83%. The 17% represented the worker's contributions. The 83% represented the employer's contribution (which were not not taxed to the worker when contributed), and the earnings on both the employee and employer contributions. They concluded that if social security were treated like private pensions, 83% would therefore be taxable. So I'm 2% off.
That is the published position and explanation for the tax treatment of SS. But it doesn't stand up to scrutiny, at all. The 15% basis in benefits is only applicable on the cohort. The individual numbers are all over the place, with some people having much more basis than 15%.
SS has the worst tax treatment of any savings vehicle for those that actually pay on 85%. The common retirement vehicles are:
tIRA and other qualified accounts, including qualified contributory pension plans. In those plans the participant contributions are tax deferred. Not true with SS, FICA starts at the first dollar.
Roth. Pay the tax on contribution money upfront (like SS), but all future benefits are tax free.
Taxable brokerage. Taxed going in. Gains are taxed when realized, but at LTCG rates.
Then there the problem of not including credit for FICA paid in past top 35. Something the "Fairness Act" didn't address. And neither does the taxation of SS. Levying FICA for years past top 35 and also taxing the earnings used to pay those FICA taxes is flat out theft.
SS tax treatment is most akin to making a non-deductible tIRA contribution, but not having any backdoor. And not surprisingly, non-deductible tIRA contributions with no backdoor are something that any competent financial planner will tell you don't make sense at all.
The rationale of making SS consistent with defined benefit plans also begs the question, why did they stop at tax treatment ? Why didn't they make SS consistent with spousal and survivor rules common in pension plans? Consistent with QDRO for pension treatment in divorce? If there is a need for funding, there's a pretty big pot of money there and the justification has already been put forward.
Honestly, the government's justification is so bad they would be better off to not have made it. I would have appreciated being told the truth "
We are imposing a means test on you" rather than a lie that insults my intelligence.
We have already started down that path.... WEP/GPO change. Might as well sink the sword in deeper!
Flieger
Yes. My opinion had been that the looming shortfall was going to take some shared sacrifice. After the "Fairness Act", I'm firmly on the side of "get while the getting is good". Not that my opinion is heard, but I'm in favor of the taxes being rescinded. Not because it's good for the program. Because it makes a more level playing field on the race to the bottom.