The End of Social Security Taxes? What You Need to Know!

Social security is changing, you know, whether we realize it or not, whether we see it daily or not, it is piece by piece. The provisions from the 1983 amendments. And those are the very rules that shape much of the system that we know today it's being dismantled. And now it looks like taxes on social security benefits could be the next thing on the chopping block. Now, when Trump was campaigning, there was a lot of discussion about eliminating these taxes, but now there's actually a bill in Congress that proposes eliminating these completely. And like everything else, it's become political. You know, I have to say, I am so thankful that most of my audience are thinkers. You don't just accept an idea because it came from the political party that you align with. You want to know whether it actually makes sense. So today we're going to break it all down. The history of social security taxation, the impact of ending these taxes and whether fairness should override the technical arguments, because if we're judging this purely on fairness, some of the technical justifications have to be thrown out the window. Oh, and stick around to the end too. I've got two brand new free cheat sheets. That's going to help you optimize your social security and your retirement planning. So before we talk about whether eliminating the taxes on social security makes sense, let's take a step back because this isn't the first time lawmakers have messed with how social security works. In fact, the system that we have today was shaped by a set of rules introduced in 1983, and one of the big changes was to add social security benefits to taxable income. And if you go back before that, from 1937, all the way to 1983, social security benefits were completely tax-free. And the rationale for this was pretty simple. You paid FICA taxes with after-tax dollars. Your benefits shouldn't be taxed again. Then along came the Greenspan commission. Now this was a group appointed by Congress and president Reagan in 1981 to figure out how to save social security from running out of money because it was scheduled to run out in 1983. And one of their solutions was to start taxing benefits. That would start to increase the revenue. Now at the time, there were already three separate treasury rulings explicitly stating that social security benefits should not be taxed, but needless to say, that did not stop them from changing the rules. Their logic was that you, the employee, paid half of the payroll tax with after-tax dollars, and your employer paid the other half, but they got a tax deduction for it. So the argument was that since part of your benefit was never taxed before, they should certainly be taxed now. And so in 1983, when those amendments were passed, part of that was a 50% of your social security benefits becoming taxable, subject to income thresholds. Needless to say though, you know how politicians are. It didn't stop there. In 1993, they added another layer and now up to 85% of social security benefits could be taxed. Interestingly enough though, the justification that they use this time was completely different. They went back and they really looked at the numbers here and they decided that on average, retirees only contribute about 15% of their total lifetime benefits through payroll taxes. That meant that the other 85% was new money and should be taxed. So, you know, for example, if you paid $60,000 into social security, but you ended up getting $400,000 in benefits, they said, well, Hey, look, 85% of that. You've never paid any tax on that. So that should be taxable, right? Now fast forward to today. So we have this new bill in Congress and we have to ask, would eliminating social security taxes actually help retirees? Or is this just another political move that is not going to end up making much of a difference? So a study from the university of Pennsylvania suggests that the impact would be minimal in terms of net benefits. They broke retirees into five income groups and found that in the bottom quintile eliminating taxes, wouldn't change net income at all. And that's because since social security is only taxed when other income reaches a certain level. Now in the second quintile, it would increase net income by about $15 per year. And then in that middle quintile, it would allow those retirees there to keep about $340 more every year. And then in the fourth quintile, it would be just over $1,100 a year. And in the very top quintile, the range was somewhere between 1,625 and 2,450 in increased net benefits if they didn't have to pay tax on them. Now that's interesting data. And I'm sure that some of you retirees are already going, wait a minute. That doesn't sound accurate. And I too have a problem with that data. When I look at real tax returns from retirees, the difference is often much larger than what that academic paper suggests that it would be. But for example, if you take a retired couple with $100,000 in taxable income, which is pretty common among the people that I work with, for them, the difference in having social security tax versus not having it taxed is going to be somewhere, you know, between five and $10,000 per year in additional taxes. So while the studies might downplay the impact, you know, the numbers that I see in practice do tell a different story on that. So this does lead us to the argument that we keep hearing about in the media over and over and over. Eliminating social security taxes will destroy the system and it's going to accelerate the funding gap much faster than we're already facing. So, you know, with the way the system is built now, that argument is technically correct. Most studies do agree that removing tax revenue would reduce inflows into the trust fund by over a trillion dollars over the next 10 years. That's a massive amount of money for a system that's already in trouble. But the real question is, does that actually matter or is this really an issue of fairness? So imagine this with me for a moment. Imagine that you've been driving on the same stretch of highway for years. It was built with tax dollars. You've already paid for it, right? Then overnight you get on the road and there's a toll booth on the road. And at first only one in 10 cars has to stop and pay. That's frustrating, but most people aren't affected. So they don't push back, right? A few years go by and now two out of every 10 cars have to stop. And then three, then four, then five, and then six out of 10 cars have to stop. And over time, more and more drivers are forced to stop at the toll booth. That wasn't an accident. It was part of the plan all along. The officials who run the highway knew that they couldn't charge everyone from the start. People would revolt and they would probably lose their jobs, but a slowly building tax now that lies under the radar. And by the time people wake up and say, wait a minute, wasn't this highway supposed to be covered by the money we already paid too late? Not only are people acclimated to paying the tax, but the taxing authority has gotten used to spending it and now they have to have it. All right. So I want to hear from you. Do you think social security should be taxed? Drop your thoughts down in the comments below. Oh, and if you haven't already, make sure to subscribe. So you won't miss these updates as this bill moves through Congress. And it may not be this bill that ends up getting passed. It may be a subsequent bill or no bills, but I S I suspect that we're going to hear more about this moving forward. Oh, and before you go, I put together two free cheat sheets, the retirement planning cheat sheet, and the social security cheat sheet. And if you sign up for one, I'll send you both. So just check the link down in the description. Thanks so much for watching and I'll see you next time.