Scott Burns: The Stealth Tax On Retiree Income

Ted

FYI:
Regards,
Ted
http://assetbuilder.com/scott_burns/the_stealth_tax_on_retiree_income

Anna

Burns has been harping on this for a long, long time. I first saw it in a column he used to write for the Dallas newspaper. The "income" tax on SS can be viewed In many ways. What's the saying "money is fungible". To understand my point, consider that the funds collected either go to the SSDI or HI funds. In my view, you have a benefit cut disguised as an "income" tax. Or, in the case of HI transfers, an increase in Medicare premiums/co-pays determined by means testing. Or whatever. Too political for our interests here at MFO, huh? (See the history at the SS website linked below.)


http://www.ssa.gov/history/taxationofbenefits.html

The marginal tax is probably felt more by seniors than for other people. When a retiree needs money from a deferred account to pay a bill (often a Medical bill is used as an example), if the withdrawal will result in additional SS subject to taxation, that retiree must withdraw the money needed, the deferred tax payment and the additional taxes owed for moving up the income level subject to taxes on SS. I don't believe so many congress critters could have a joint brain infarct so I think the benefit cut was the intended goal. (Avoids a higher payroll tax or a higher cap or other less popular language). So the failure to index the cutoffs was one of those acci-intentional consequences.

msf

I like Scott Burns, but he is playing fast and loose with facts and figures here.

Burns writes: "When Social Security was created one of the fundamental promises was that benefits would never be taxed."

SSA responds:

Myth 5: President Roosevelt promised that the annuity payments to the retirees would never be taxed as income

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have "promised." It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program

Those Treasury rulings are what begin the page that Anna cited.

If we're going to look at the original operation of the program, originally there was no adjustment for inflation. And that was built into the law. For its first 10 years, there was no increase in SS benefits. It wasn't until 1975 that adjustments became automatic.
http://www.ssa.gov/history/briefhistory3.html#colas

Appealing to "original intent" is a double-edged sword. Better to describe what are the desired attributes of a social security system.

As to Burn's figures, he writes about how huge the tax increase is (in percentage terms) when adding in SS benefits. But that's because the pre-benefit taxes are so low. If you start with $1 in taxes and something raises that to $2, well you've just doubled your taxes!

Burns seems to recognize he's relying upon this distortion. He carefully omits the percentage increases at the very lowest end (I assume because it would highlight the absurdity of this metric). Specifically:

At an income of $18,000 our couple pays no taxes, with or without the addition of $23,343 in Social Security benefits.

Increase other income to $24,000 for our couple and their tax bill would be only $86.

Imagine that - going from $0 in taxes to $86. That's infinitely more taxes, in percentage terms.

But when Social Security benefits are added, the bill rises to $343. It’s a big increase, but it’s still a small amount.

Here he's diverting attention away from the percentages - they still look ridiculous. $343 is a 299% increase (i.e. a quadrupling) over the former $86 tax.

It's only when the percentage drops under 100% (because the base has increased) that he starts calculating percentage increases in taxes. What he doesn't present is the marginal rate of taxation.

Not that that is small. The maximum marginal rate that one can have (assuming one remains within the 15% tax bracket) is 27.75%.

I believe that his calculations are in error, for he shows marginal rates higher than this figure. For example, in going from $36K to $42K, the tax, including SS income, goes from $2561 to $4256. That's an increase of $1695, which is more than 27.75% of the extra $6K in income.

That 27.75% comes from adding $1 to ordinary income in a 15% tax bracket. The worst effect that can have on SS benefits is to make $1 of benefits subject to taxes. And the most of that $1 that can be taxed is $0.85.

So the extra $1 creates an extra $1.85 in taxable income. 15% of that is 27.75c, hence 27.75% tax rate.