Under federal tax law, Social Security amounts that people receive are either 1) not taxable if income is low enough; 2) partially, from 0% to 85% as your income rises or 3) fully if you pass a certain income threshold. Your income is based on a Modified AGI which is basically gross income, subject to certain things such as municipal bond interest income.
Should Social Security be taxed? A fundamental principle of taxation is that you should not be taxed on money on the monies you have already paid. Because people have already paid taxes to Social Security by having it withdrawn from their pay, people have this (correct) assumption that when they get the money back, it should not be taxable.
Interestingly, the current method of taxation calculation was set up 15 – 20 years ago. At that time, it was determined that that the average person would collect in benefits much more than they put in; their costs (the amount they put in) would be likely 15% of the total amount they collect. If that’s correct, it seems only fair you pay taxes on 85% on what you collect.
For instance, if a person paid $15K into Social Security over their working years, and then withdrew 100K during their retirement, they should rightly pay taxes on that amount above and beyond what they put in. The problem is that it would not be fair if you put in 50K and get back 100K. In this case, you should only pay on 50%, not 85%
In the earlier years of Social Security, people didn’t put in anywhere near the 15%, they put in more like 1% of the total they collected, and got it back 100x. But it wasn’t even taxed. Then they changed the laws as they needed more revenue. And since then, the percentage that recipients are getting back as opposed to what they do put in, has drastically changed. Now, the average person is putting in more while getting back less, and the situation will only grow more acute as the Social Security Fund runs out of money. The scenario of money-in, money-out has changed.
Congress, in its infinite capacity to forget things, has never changed that rule resulting in more income being fleeced from the taxpayer.
Social Security began as a trust fund to remain separate for American workers. LBJ raided the trust fund and put it in the government’s general fund – to be spent and never repaid. Social Security was also not taxed until the Clinton Administration, and the FICA withholding income tax deduction was also eliminated.
One might think that the double taxation incurred today supports the egregious Social Security system. But actually, the money goes into the general tax revenue account and not in the Fund. The Social Security Administration collects and records the gross Social Security tax receipts, while the net amount, after deductions, is sent to the IRS. Yet the gross amount is spent by the government, resulting in the staggering deficit we face today. According to the Social Security trustees, in a report released last month, unfunded liabilities amount to an $18 trillion deficit.
Social Security is merely an unsustainable ponzi scheme. Considering the fact that citizens will receive far less – of their own money – than they put in, it is morally reprehensible that Social Security is taxed they way it is.