Inflation is giving lower income retirees smaller COLA increases

[Gumby]

...The government told me one thing in 1965 when I made my first payment,...

The Supreme Court decided Flemming v. Nestor in 1960, before you ever contributed, so you were on notice that things could change. And, as others have noted, tax laws change all the time. At one time, there was no alternative minimum tax. Now there is. Once, you could deduct interest paid on consumer debt. Now you can't. Once, you could deduct the full amount of your state and local taxes (SALT). Now SALT deduction is limited to $10,000 per year. And so on and so forth.

....
Basically, since we already paid taxes on the money we put into the TRUST fund, the money can’t be taxed a second time when we take it back out.

...

As has been explained to you before, only about 15% of your current social security payment is a return of your contribution. The other 85% represents growth on your contributions, which has not yet been taxed. That's why they picked that number in 1993. For purposes of comparison, I receive a pension to which I contributed over the years. So I have a "basis" in my pension. When I receive payments, some of that amount is a return of that basis, so I deduct that percentage out of my payment and pay taxes on the rest. It works the same way with post tax contributions to a tIRA. I unwisely made such contributions back in the 1990s. So now, when I take a tIRA distribution, I subtract out a percentage representing my basis and pay taxes on the rest. I keep track of that basis with Form 8606.


As to your point about the Treasury rulings, it is a basic legal principle in the United States that while executive branch agencies like the US Department of the Treasury can interpret the laws, only Congress can make the laws. So Congress is not bound by Treasury rulings. Rather, Treasury is bound by the laws that Congress makes. In 1983 and 1993, Congress changed the law.

 

[pb4uski]

Following the enactment of Social Security in 1935, the U.S. Treasury Department issued a series of tax rulings that determined Social Security benefits were not taxable.

Basically, since we already paid taxes on the money we put into the TRUST fund, the money can’t be taxed a second time when we take it back out.



It remained that way until the 1983 legislation. Our half of the money going into the trust fund has already been taxed. The matching funds from our employer are a tax deductible business expense, so half, 50%, of our benefits could become taxable.


Then in 1993 they changed it to 85% taxable for no reasonable reason.


This is exactly the same ruling that is currently in place for Roth IRA accounts. How would you feel if the government changed their mind and said that everything we take out of our Roth IRA is taxable just like what we take out of our traditional IRA?



The only difference between a Roth IRA and the TRUST fund is that the government is not forcing you to contribute to a Roth!

You are TOTALLY WRONG on almost all of this.

Treasury Rulings are the U.S. Treasury Department's interpretation of tax law. Laws can and are continually changed. Get over it.

The after tax money that you paid into the system is not taxed a second time... you are wrong... what you paid in is the 15% that is not taxed. The 85% that is taxed is the excess of benefits paid over what you paid in. If you have a non-deductible IRA then the portion of benefits representing contributions isn't taxed but the excess is. The same thing for contributiory pension plans... your contributions are not taxed.

There was a reason for the 85%. It is all explained here: https://www.ssa.gov/history/taxationofbenefits.html

... Estimates by the Office of the Actuary of the Social Security Administration indicate that workers now entering covered employment in aggregate will make payroll tax payments totaling no more than 17 percent of the benefits that they can expect to receive. The self-employed will pay no more than 26 percent on average. Therefore, if social security benefits were accorded the same tax treatment as private pensions, only 17 percent of the benefit would be exempt from tax when received, and 83 percent would be taxable. ...

I have reproduced this calculation for me and the 15% is pretty close but since it is an average then you individual results may vary.

The tax-free status of Roth accounts is based on the law that established Roth accounts, not the Treasury Rulings. But since all laws can be changed, it is possible that it could be changed in the future... unlikely but certainly possible.

The only thing that was right in your whole post was the last sentence but even that probably should have said traditional IRA rather than Roth IRA.

 

[Gumby]

As has been said in a totally different context -- "When you're accustomed to privilege, equality feels like oppression." For years, social security payments were privileged with respect to taxation. And now that privilege is gradually being removed. Eventually, social security payments will be treated for taxation purposes the same as any private contributory pension, and people will cry that they are being oppressed.

Would I like to receive my social security money tax free? Might as well ask if water is wet. But I know what the law has been for the the past 40 years and I think it is good public policy. Just be grateful that you don't live in a state that also taxes social security, as mine does.

 

[TheWizard]

As others noted, Congress changes laws related to taxation all the time. I was able to claim my divorced spouse SS benefit at age 66 while delaying my own benefit to age 70. Then Congress voted that option away for younger folks.

Within the next ten years, Congress will likely do something to deal with the coming SS shortfall. No idea what they'll end up doing, but I'll deal with it.

It's silly to think that any tax law will remain unchanged forever...

 

[Fermion]

The social security thing doesn't seem nearly as unfair as the states which exempt pensions from tax but don't exempt 401K withdrawals.

 

[pb4uski]

^^^ +1

 

[Taco]

Thus is why the one and only way to save SS for those who actually need it is to means test the benefit and reduce/eliminate payments to those who have higher non-SS incomes.

youbet,

Assume 2 people had the exact same income and paid the exact same amount in SS taxes.
One saved, lived below their means and was financially responsible.
One spent everything and was financially irresponsible.

You are advocating that we penalize the responsible saver, and reward the irresponsible spender.

People respond to incentives. Everyone would be incentivized to spend now, so they would get more "free money" later. Saving would be a fools game.

What a disaster that would be...

 

[TheWizard]

SS benefits are ALREADY means tested to a degree in that we higher income retirees have 85% of our benefit subject to taxation.
In a few decades, of course, practically everyone will be in that situation so we'll have to devise a new way of soaking the rich...

 

[Sandy & Shirley]

The primary means testing is done by the Social Security Bend Points used to determine our benefits. Using your top 35 years of inflation adjust income, for 2024, your first $1,174 of monthly income is returned to you at 90%, the next $5,904 is returned at 32%, and the next $6,972 is returned at only 15%.

The lowest income individuals get a 90% return on their FICA taxes while everything you earn and pay FICA on over $84,936 is only returned at only 15%.

 

[TheWizard]

The primary means testing is done by the Social Security Bend Points used to determine our benefits. Using your top 35 years of inflation adjust income, for 2024, your first $1,174 of monthly income is returned to you at 90%, the next $5,904 is returned at 32%, and the next $6,972 is returned at only 15%.

The lowest income individuals get a 90% return on their FICA taxes while everything you earn and pay FICA on over $84,936 is only returned at only 15%.

Absolutely correct about how the bend points work, BUT... that's all related to the person's income during their working years, not their retirement years.
So it's possible to have a high PIA and very little other retirement income or the opposite.

I think means testing would look at your current situation in retirement similar to the way IRMAA works...

 

[Sandy & Shirley]

The means testing on the percentage of your SSB that you have to give back to the TRUST fund is also very interesting.

If you are avoiding the 40.7% Tax Hump with an after tax lifestyle of 60K to 80K, your taxable SSB will probably be around 60% but you will be in the 12% Tax Bracket, so the IRS will only give back about 7.2% of your benefits to the TRUST Fund.

If you are living a 6 figure retirement lifestyle you will be paying taxes on the full 85% of your SSB. If your top Tax Bracket is 22%, the IRS will give back 18.7% of your benefits to the TRUST Fund and if you are in the 24% Tax Bracket they will give back 20.4% of your benefits.

That is definitely “means testing” the higher your lifestyle the larger the percentage of your SSB that the IRS gives back to the TRUST Fund.

 

[Northforker]

I'd like to see the cap removed from income subject to SS tax. Buffett, Bezos, Zuckerberg, Musk, et al would never miss it.

 

[Raygun99]

Not 100% part of this thread but my 3 major expenses for my retired houshold.. Insurance up 23% Food up 12% and Utilities uo 10%... SS COLA? not even close.

 

[Gumby]

Not 100% part of this thread but my 3 major expenses for my retired houshold.. Insurance up 23% Food up 12% and Utilities uo 10%... SS COLA? not even close.

You're right - not part of this thread.

 

[youbet]

youbet,



You are advocating that we penalize the responsible saver, and reward the irresponsible spender.

.

Totally BS and a lie.

 

[Gumby]

MODERATOR NOTE: We can disagree without being disagreeable.

 

[pb4uski]

Not 100% part of this thread but my 3 major expenses for my retired houshold.. Insurance up 23% Food up 12% and Utilities uo 10%... SS COLA? not even close.

You're right - not part of this thread.

Actually, not 0% part of this thread.

 

[pb4uski]

youbet, ...

You are advocating that we penalize the responsible saver, and reward the irresponsible spender. ...

Spot on.

 

[youbet]

Always interesting to follow along on how posters support only the policies that promotes their personal interests and finances. But, I guess that's just human nature for some.......

 

[pb4uski]

Yup, you keep claiming that, but nobody is buying your poppycock.

 

[youbet]

I'd like to see the cap removed from income subject to SS tax. Buffett, Bezos, Zuckerberg, Musk, et al would never miss it.

And they wouldn't miss having their current SS payments reduced. And all financially secure folks currently receiving generous SS benefits wouldn't miss a cut either, despite their "whining" that they're "entitled" to what they were "promised."

 

[youbet]

Yup, you keep claiming that, but nobody is buying your poppycock.

Yet your posts imply it applies very specifically to you.

 

[pb4uski]

Yet your posts imply it applies very specifically to you.

With a 2.5% WR it doesn't apply to me at all. Personally, I could care less. But I think it is a really bad idea from a public policy perspective.

So, time for you to put up or shut up... provide the posts.

 

[youbet]

With a 2.5% WR it doesn't apply to me at all. .

Actually it does.......

 

[pb4uski]

Something to consider:

Social Security's chief actuary, Stephen Goss, has raised concerns about reforms that could undermine the program's long-term sustainability and erode public trust. He has specifically highlighted the potential dangers of means testing benefits, which would reduce or eliminate payments for certain individuals based on their income or wealth.

Here are some of the key concerns raised by Goss:

• Erosion of public trust: Means testing could undermine public trust in Social Security by changing the perception of the program from an earned right to a welfare program. This could lead to decreased participation and support for the program in the long run.
• Shifting the focus away from individual equity: Social Security is currently based on the principle of individual equity, where benefits are proportional to contributions made through payroll taxes. Means testing would shift the focus towards social adequacy, prioritizing benefits for those with lower incomes. While this may be desirable from a social welfare perspective, it could be seen as unfair to individuals who have consistently contributed to the system.
• Limited financial gains: While means testing could achieve some financial savings for the program, Goss argues that these savings are likely to be relatively small when administrative costs are factored in. He estimates that means testing would only save Social Security about 0.3% of payroll taxes over the next 75 years.
• Administrative complexity: Implementing and administering a means test would add significant complexity to the Social Security system. This could lead to errors, delays, and increased administrative costs.
• Uncertain effects: The long-term impact of means testing on Social Security's financial stability and public support is difficult to predict. Goss has expressed concerns that it could lead to unintended consequences and exacerbate the program's financial challenges in the long run.

Goss has also suggested alternative reforms to address Social Security's long-term financial challenges:

• Gradual increases in the payroll tax rate or the full retirement age.
• Expanding the taxable wage base.
• Reducing the cost-of-living adjustments (COLAs) for benefits.
• Eliminating the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).

These reforms would be more gradual and less disruptive than means testing, and they would have a more predictable impact on the program's finances.

Overall, Goss's concerns highlight the need for careful consideration of any reforms to Social Security. It is important to ensure that any changes made to the program are sustainable, equitable, and supported by the public.

Here are some additional resources that you may find helpful:

• The Social Security Challenge: https://www.actuary.org/socialsecurity
• Means Testing for Social Security: https://www.actuary.org/sites/default/files/files/Means_Testing_SS_IB.pdf
• Social Security Reform Options: https://www.actuary.org/node/13744

It is important to note that these are just some of the concerns raised by Goss and other experts. There is ongoing debate about the best way to address Social Security's financial challenges, and it is important to consider all sides of the issue before making any decisions about the program's future.