Many changes happen to the Social Security benefits program automatically. In most years, for example, there’s a cost-of-living adjustment that results in an increase in benefits so buying power doesn’t erode as prices increase. There’s also an increase most years in the maximum amount of income you pay Social Security tax on and in how much you can earn while working and collecting benefits before forfeiting some of your retirement check.
These changes exist for an important reason: Wages and prices increase over time. If Social Security didn’t adjust to these changes, the program would no longer work. The monthly payments people get would be too low to pay current prices, among other issues. That’s why they were built into the benefits program.
Even though many of the relevant financial numbers affecting Social Security change automatically, there’s one thing that won’t be modified with the passage of time. And the fact that this factor doesn’t change ends up really hurting seniors.
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This Social Security rule doesn’t change, and that has serious consequences
Unfortunately, one rule that doesn’t change when it comes to Social Security is the rule for when retirement benefits become taxable.
Originally, Social Security benefits weren’t subject to federal tax at all. But that changed thanks to 1983 amendments to shore up Social Security. In 1983, when the law was passed, Congress set the rule that up to 50% of retirement benefits could be taxable if provisional income exceeded $25,000 for single tax filers and $32,000 for married tax filers. Provisional income is all taxable income, some non-taxable income, and half of retirement benefits.
Then, in 1993, the law was changed again, and now up to 85% of benefits could be taxable for single filers with income above $34,000 and for married joint filers with incomes above $44,000.
When the law imposing tax on Social Security benefits was first passed, fewer than 10% of retirees ended up paying taxes on benefits. But here’s the big problem: The threshold at which benefits become taxable was not indexed to inflation.
If the income limits had been adjusting upward over time as wages and prices went up, then benefits wouldn’t be taxable until single filers had an average income of around $68,400. And married taxpayers wouldn’t have to worry about giving the IRS a cut of Social Security until their income reached $87,550.
Because these limits have not changed, though, around 50% of retirees are now subject to federal tax, leaving them with less money for other things. Unfortunately, this rule will not change in 2024 again, so that means every current and future retiree whose income has gone above those thresholds will now have a new bill to worry about.
With the surges in inflation in recent years, many retirees need every dollar of their Social Security benefit to pay for groceries and other necessities. Unfortunately, they’ll have fewer of those dollars now because this income threshold wasn’t indexed to inflation as so many other important Social Security rules were.