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Bills to eliminate Social Security taxes are ‘slippery little suckers’

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Slippery little suckers,” Julia Roberts exclaimed as one of her escargots flipped out of her grasp and across a fancy restaurant in the movie Pretty Woman.

I remember that scene when I think about Congress.

Here’s the latest from the slippery little suckers.

As legislation titles go, this one grabs your attention. The “You Earned It, You Keep It Act” is making a second attempt to eliminate the taxation of Social Security benefits. Reintroduced in late January by Colorado Rep. Angie Craig (D), the bill eliminates the taxation of Social Security benefits for all retirees.

It is one of many such bills in a long history of efforts that have gone nowhere.

The bill comes with an assessment of its financial impact on Social Security by Stephen C. Goss, its chief actuary. He notes that while one change in the bill eliminates the taxation of benefits, another — a tax increase — would extend the financial health of our retirement system out to 2054.

That’s a big improvement over the current estimated drop-dead date. Without any changes, Social Security benefits will have to be cut about 23% in 2034.

Scott Burns(EVANS CAGLAGE – 194187)

I should be thrilled by this legislation.

I’ve hated the taxation of Social Security benefits from the get-go. The reason is simple: It was created in a bipartisan but dishonest, and cowardly, way. When the tax became law with the Social Security reforms of 1983, few Social Security recipients had to pay any tax.

It was a non-event.

Why? The income threshold for the tax was high. Few would pay it.

But unlike virtually every other part of our tax code, the income threshold was fixed. It was not indexed for inflation. It never changed.

But inflation has soared.

Today, the tax is a middle-income problem. There was a time, long ago, when tea was tossed into Boston Harbor to protest “taxation without representation.” Congress, not distant King George, passed a tax that would be significant decades later. It was a generational end run on representation.

The Burns family has a dog in this hunt today. Back then, we didn’t. Back then, we were in our early 40s. Social Security benefits weren’t top-of-mind. Today we receive Social Security benefits. We pay taxes on 85% of our Social Security income. Many retirees find their federal income tax bill doubled.

We’re not talking peanuts here. If you have income from pensions, savings, investments or retirement accounts, ending the taxation of Social Security benefits will dwarf any other tax reform proposal — unless your income puts you in the top 1% or 2% of all taxpayers.

But I don’t want my taxes cut if it is achieved by putting a massive tax increase on others. That’s what this proposal does. Indeed, it’s really a large tax increase being sold as a tax cut for retirees.

The proud press releases brag on ending the taxation of benefits. The press releases are thin on how the system will gain enough revenue that its financing improves. Retirees get the prize. But high-income workers pay a much larger tax bill.

Here’s how that happens.

In 2023, the employment tax that provides retirement and disability income stopped at an income of $160,200. Under “You Earned It, You Keep It,” the tax will also apply to all earned income over $250,000.

That leaves a doughnut hole of untaxed earnings between $160,200 and $250,000. It will disappear as the wage base maximum rises to $250,000. The actuaries project that will happen by 2035.

After that, all earned income will be subject to the employment tax. It’s a lot of money. It will easily cover the loss of revenue from the taxation of Social Security benefits. At the same time, it will push the cash crisis of Social Security 20 years down the road.

The top earners will pay a lot more in taxes. Will they get anything for that burden?

Yes. They get a stick in the eye. All earned income over the wage-base maximum will be credited at a 2% rate on their Social Security earnings record. Virtually nothing.

What most people don’t realize is that the highest effective tax rates are hidden inside the benefit-crediting system of Social Security. This isn’t a crime. It’s a social insurance program. It’s not a pension system.

Under current law, workers with indexed monthly income under $1,174 are credited at a 90% rate. Workers with indexed monthly income over $1,174 but less than $7,078 are credited at a 32% rate. Workers with indexed monthly earnings over $7,078 but less than the wage base maximum are credited at a 15% rate.

This legislation would create an additional step crediting all indexed income over the wage base maximum at 2%.

As the Pretty Woman said, “Slippery little suckers.”

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