Why is social security taxed?

My wife and I had are taxes done recently. In conversation, the tax guy happened to mention that social security was taxed. I always assumed ss wasn't taxed because it is based on earnings accumulated from jobs where we have already earned and paid taxes on.

 

Probably because, to be taxed significantly, it has to be received on top of other income, pushing one into a higher bracket and, thus, more tax payments.

Social Security was designed as "old age insurance" to protect people when they were past working age yet still needed income. If your payments are being taxed, you're in a higher bracket than the folks who rely upon it as their sole source of retirement income. Thus, you're not the target for it.

Another way to bring this about is needs-testing Social Security. You don't need it, you don't get it, but you paid the premiums to protect yourself in case of disability or old age poverty. Like auto insurance. You don't get your money back if you don't have an accident--you paid to cover your risk. But because everyone (almost) has to pay into Social Security involuntarily, there's a great deal of pressure to pay everyone. So progressive taxation evens this out a bit.

Now, if you think if Social Security as a retirement investment plan, then you don't like all of this. After all, you paid your money in, you want your money out. But it isn't really an investment. It's insurance.

As one of my mentors, Lyle, used to say about paying high taxes, "it's the kind of problem you want to have."

 

Rule #1 in all business dealings - do not assume.

Here's the IRS page on it.

https://www.irs.gov/uac/Newsroom/Are-Your-Social-Security-Benefits-Taxable

J.

 

SS is taxed for anyone over a combined (including SS) income of $32K/y.

 

How about the government leaves me alone, and if I don't plan adequately for retirement, then shame on me?

I would have opted out of Social Security as soon as possible if I could have, and invested the money in a private retirement account. Besides getting an astronomically better return, I'm not enthralled with the idea of MY money going to people who never paid a dime into the system.

As Margaret Thatcher said, "The problem with Socialism is that you eventually run out of other people's money".

 

Good luck with that.:no::no1:

 

Rough statement: FICA tax is no longer paid (at least not the 6.2% social security part). Everything else is taxable, to include social security benefits, based on the aggregate amount of income.

 

That's certainly one approach. Social Security is an insurance plan, not an investment plan. The problem with allowing people to opt out is that they can more easily become a burden on everyone else. This is why automobile insurance is required. It's the logic behind helmet laws for motorcyclists. Speed limits. And a lot of other requirements imposed socially for the common good. Be mad at that, fine. But don't be mad at Social Security for something it is NOT.

 

Not only is 85% of US social security taxed but medicare payments are also deducted. I have tax free income except that it is counted for in determining the amount of social security that is taxed (Form 1040, line 8b).
I receive social security but at the same time I still pay self employment tax (a social security premium) of 15.3%.

I've not done a detailed analysis but I estimate the percent return on my social security payments will about the same as my 401K. An excellent deal in my opinion. However I do realize that changes are needed to ensure its viability for the future.

 

Hey Ian, thanks for your comments, haven't heard from you in a while. You mentioned medicare and it got to me thinking. Part of my retirement package will be that I receive lifetime medical benefits for a premium of zero, nada! You mentioned that medicare is deducted from ss. I wonder if I will be forced to go on medicare even though I will have my own insurance? I mean, it seems better for me if I could just forgo medicare and stay on my own insurance. I don't know if they will allow that though. I am guessing that if you receive ss you probably must go on Medicare at retirement age regardless. I don't know. I guess I would have dual coverage at that point. What do you think?

I will call the SSA when I have time as well. I am only 50, but I want to plan for this stuff well ahead of time.

 

FICA tax covers social security taxes and medicare taxes.

In FICA, a 6.2% Social Security tax is paid, until it is drawn (or around 15% is paid by the self-employed). Most people begin drawing it between ages 62-70.

In FICA, a 1.45% Medicare tax is paid, until it is drawn at age 65. Medicare covers about 80% and personal health insurance usually covers the remaining 20%.

The rules change for disabled people who collect Social Security benefits before age 62.

On a different note, if a person has excellent health and expects to live a long time, it is best to wait until age 70 to collect Social Security because the monthly benefits are drastically increased (for waiting). An exception to this rule is:
1. Those who don't expect to live very long.
2. Those who financially need the money at age 62.

 

Thanks for the info. me again. I also read somewhere that Medicare only covers things like long term care nursing care for relatively short amounts of time. That's kind of alarming given the very high cost of those places. I took out a long term care policy for my wife and I back when I was 35. Given that I signed up for the policy so early, I only pay $110.00 for my wife and I. I guess I will continue paying that just in case.

 

Abner,
I don't know the answer to your questions but if you are paying the full FICA rate then perhaps you can use both insurance policies to your advantage. I use a Medicare Advantage plan which offers advantages over pure medicare and yet reduces cost to medicare. I've also learned that very few things in life stay the same forever so who knows what the US health care provisions will be in 15 years or so with an ever increasing portion of the population becoming senior citizens.

 

It's an approach. I'd even argue that it has more merit than we give it credit for. There are also people who don't have enough money for retirement despite careful planning. If you were one of the thousands who lost your life savings because Madoff took it all then who is the "shame" on? Keeping in mind, of course, that there were many private investors who had no idea that their money was in Madoff's pocket. They invested in what were believed to be reputable funds through ostensibly reputable brokers. Some of whom took those discretionary funds and placed them with a crook. Even in that case, the brokers were acting (most times) in good faith. They were putting money with Madoff because he posted such good returns.

Or what about the people who get wiped out by medical bills and decades worth of savings is out the window? Now, too sick to continue working, they have nothing to fall back on.

My neighbors have a son with Down's Syndrome. A fine young man. Since he's turned 18, he's received a check from Social Security. Now, I can see the argument that he shouldn't get it since his parents are providing for him. But they aren't going to live forever.

The problem with the "government should leave me alone and to hell with whomever doesn't plan" model is that such a model was implemented for many, many years in virtually every society. If we institutionalize the disabled, shuffle off the elderly to state run nursing homes the moment they cease being able to work or be willing to simply let both die in the gutters then the plan works marvelously well. But then you can't really complain when Boston begins to look like Calcutta.

Here's one of those issues with definitions.

Providing a safety net for the elderly and disabled isn't "socialism." Just because the government funds it doesn't make it "socialism." If it did, then the police would be nothing more than a socialist construct and we'd be better served sending the function out to the open market for bidding. I figure a private police department could probably get your town's budget down drastically if they stopped providing retirement, health benefits and reduced salaries to $10/hr. It may seem drastic, but that's largely what private corrections companies do. And there seems to be ample press supporting firing police officers and replacing them with lower paid private security. After all, I have never called the police. Why not leave my taxes to me and, if I end up getting hacked to death by my wife, it was my fault for marrying someone capable of committing murder in the first place, right? Home invasion? Well, no one protected the land rights of the cowboys. I should just arm up and handle it myself. If I can't repel an outside attack on my family homestead then I suppose they just deserve it more than me.

Roads, telephone lines, electricity, police, fire and ambulance are all necessary pieces of infrastructure that we rely on to thrive. Add to that infrastructure the fact that we take care of our elderly and disabled and it's part of what makes us a civilized society and an enviable place to live. Take those things away and you get personal autonomy. There's plenty of personal autonomy in places like Somalia. You can have all the guns you want. No one takes away your money and spends it on anyone else.

That said, I don't support governments getting into things that shouldn't involve them. And I don't think the government should be bigger than it needs to be. I'm not a fan of the government controlling the means of production (which would actually be socialism). So I don't want to have a state owned oil company or a state owned natural gas company. But making sure that the disabled are cared for? Yeah, I'm OK with my money going to that.

 

I know a lot of people lost around 40% of their retirement investments during the economic downturn. What happened to the ones who were close to retirement? Did they make the money back in time?

 

Thanks Ian and everyone else who commented. Yeah, my parents have Medicare, but they purchased supplemental insurance from Kaiser. I have Kaiser insurance myself, great health care provider.

Just trying to plan ahead.

 

When FDR proposed Social Security in the early 30s, he was vigorously opposed by the Republicans. 25 years later, a clever reporter tracked down and interviewed a lot of the most vigorous opponents, who had since reached 65. IIRC, 100% of them were accepting their payments, most thought it was a good thing, and many forgot that they had opposed it. I've made a note in my calendar to ask Bruce in 2046 how he feels about it.

 

John, you will not be alive (in your current mortal body) when that date arrives. You'll either be in heaven or in hell (hopefully in heaven).

Ben Franklin (or someone famous) said that "Once the people realize that they can vote themselves into prosperity, then the Republic is doomed."

John, you're a good man.