When Received Earned Social Security Is It Taxed Again
Since 1984, Social Security beneficiaries with full income exceeding certain thresholds have been required to pay federal income revenue enhancement on some of their do good income. Because those income thresholds accept remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time. A Social Security Administration microsimulation model projects that an annual boilerplate of about 56 pct of beneficiary families will owe federal income revenue enhancement on part of their benefit income from 2015 through 2050. The median percentage of benefit income owed as income tax by beneficiary families will rise from 1 pct to five percent over that period. If Congress does not adjust income revenue enhancement brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.
Patrick Purcell is with the Office of Retirement Policy, Office of Retirement and Disability Policy, Social Security Administration. Questions about the analysis should be directed to the author at (202) 358-6348.
The findings and conclusions presented in this paper are those of the authors and do not necessarily represent the views of the Social Security Administration.
Summary and Introduction
| AGI | adapted gross income |
| AWI | average wage index |
| CBO | Congressional Budget Office |
| IRS | Internal Revenue Service |
| MINT | Modeling Income in the Near Term |
| OBRA 93 | Charabanc Budget Reconciliation Act of 1993 |
| SIPP | Survey of Income and Programme Participation |
| SSA | Social Security Administration |
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to claim role of their Social Security benefits as taxable income. The income thresholds for taxation of benefits have remained unchanged since Congress first established them but, because wages have increased, the proportion of Social Security beneficiaries who must pay federal income tax on their benefits has risen over fourth dimension. In 1984, less than 10 percent of beneficiaries paid federal income revenue enhancement on their benefits. A Social Security Administration (SSA) microsimulation model, Modeling Income in the Near Term (MINT), projects that 52 percent of families receiving Social Security benefits volition pay income tax on their benefits in 2015. Well-nigh of these families will be in the upper half of the total-income distribution.
This issue paper presents MINT projections of the percentage of Social Security beneficiary families that will owe federal income tax on their benefits also equally the proportion of do good income they will owe as income tax in selected years from 2015 to 2050, with comparative data for 2010. Although 13 states likewise revenue enhancement Social Security income, the scope of this newspaper is restricted to federal income taxes.
In summary, MINT projects that an annual boilerplate of about 56 per centum of casher families will owe income tax on their benefits over the period 2015–2050. For 2015, MINT projects that beneficiary families will owe a median of less than 1 percent of benefits in income taxation, but that 1-fourth of those families volition owe xi percent or more of their benefits in income revenue enhancement. The model projects that the median percentage of benefits owed equally income revenue enhancement past casher families volition rise to about 5 percent over the projection menses. Amidst the 52 percent of families that are projected to owe federal income revenue enhancement on their Social Security benefits in 2015, the median share of benefits owed as tax volition be 11 percent. For those families, that proportion will remain close to 12 percent over the menses 2020–2050.
Projecting revenue enhancement over a period of decades requires sure assumptions about future revenue enhancement policy. For instance, under current law, income taxation brackets are indexed to the rate of growth of consumer prices. In the long run, incomes tend to rise faster than prices every bit labor productivity increases. If tax brackets continue to be indexed to prices, the share of benefit income paid as taxes eventually volition rise above its historical average. Long-term taxation estimates must assume either that income tax brackets volition continue to be price-indexed or that Congress volition act to adjust the brackets upwardly.1 The estimates in this paper contain the primal assumption that Congress will act before 2025 to suit the tax-subclass thresholds upwardly. MINT assumes that the provisions of the tax code that currently stipulate the apply of price indexing will modify to require wage indexing afterward 2023. If tax brackets continue to exist indexed to prices indefinitely, the proportion of Social Security benefit income that beneficiaries owe as income taxation will be higher than the estimates shown in this paper for years after 2023.
Another of import caveat near the estimates in this paper is that they utilise only to Social Security beneficiaries who are modeled in MINT. Adjusted by sample weights, the casher population modeled by the current version of MINT represents 54.3 million persons in 2015, or 92 pct of the average monthly beneficiary population of 59.0 million for January–June 2015 (SSA 2015b). As a effect, MINT simulations differ from administrative estimates produced by other federal agencies. Equally explained in Box 1, the deviation is attributable mainly to certain income characteristics that typify the beneficiaries not simulated in MINT more strongly than they represent beneficiaries overall. Additionally, MINT simulations reflect scheduled benefits under current law. Nonetheless, because Social Security's Board of Trustees (2015) estimates that the trust funds will be depleted in 2034—after which, Social Security payroll tax revenue would be sufficient to pay only virtually 75 pct of scheduled benefits—Congress will presumably take remedial action before then. Thus, the long-term continuation of scheduled benefits under current law is uncertain, as is the timing of any substantial changes.
Box 1.
How MINT simulations differ from other federal estimates of Social Security benefit taxation
Each year, the Treasury Section'south Office of Tax Analysis (OTA) estimates the amount of revenue generated by the taxation of Social Security benefits. The Treasury uses those estimates to credit income tax revenue to the Social Security trust funds. For 2015, OTA estimates that federal income taxes on Social Security benefits will equal about v.9 per centum of aggregate do good income, in dissimilarity with the 7.ii percentage figure estimated by MINT. The difference betwixt the two estimates stems in large function from the difference betwixt the bodily number of Social Security beneficiaries and the number of beneficiaries simulated in MINT. For example, for Jan–June 2015, the monthly number of Social Security beneficiaries averaged 59.0 1000000. MINT simulates a 2015 beneficiary population of 54.3 million, or 92 pct of the actual number of beneficiaries. MINT excludes beneficiaries born before 1926, child beneficiaries, disabled beneficiaries younger than age 31, and beneficiaries who reside in nursing homes.
Co-ordinate to data from the Census Bureau'southward March 2014 Current Population Survey, the beneficiaries excluded from MINT are generally less probable to owe income tax on their benefits than are those included in the model simulations. In 2013, for case, 52 percent of kid beneficiaries and 45 percent of beneficiaries aged lxxx or older lived in families with incomes lower than 200 percent of the federal poverty threshold, compared with only 30 percent of beneficiaries anile60–79 (who comprise most two-thirds of the casher population). On boilerplate, nursing abode residents are older and poorer than other anile beneficiaries are; therefore, they likewise are less likely to owe taxes on their Social Security benefits.
If MINT simulated all beneficiaries, its estimates of taxes owed equally a percentage of benefit income would exist lower and, thereby, closer to the OTA estimates. As they are, MINT estimates closely resemble those of the Congressional Budget Part (CBO). CBO estimates that 51.v million beneficiaries paid vi.7 percent of their Social Security benefits as income taxation in 2014 and projects that income taxes owed on Social Security benefits will rise to more than 9 percentage by 2039 (Shakin and Seibert 2015). MINT estimates that 52.4 million beneficiaries paid half dozen.vii percent of their benefits every bit income tax in 2014 and projects that income tax owed volition exceed x pct of benefit income past 2040. Like all estimates, these projections are uncertain and their accurateness depends on the reliability of their underlying data, methods, and assumptions.
Background
The first Social Security benefits were paid in 1940. From that time until 1984, benefits were exempt from federal income tax, every bit authorized by Treasury Section rulings issued in 1938 and 1941 (SSA n.d.). Because other forms of retirement income (such as private- and public-sector pensions) were bailiwick to income tax, policymakers eventually reconsidered the tax exemption for Social Security benefits. Both the 1979 Advisory Council on Social Security (1979) and the National Commission on Social Security Reform (1983) recommended that some Social Security benefits be included in taxable income.
The Social Security Act Amendments of 1983 (Public Police98-21) established that beneficiaries whose total annual income exceeds certain thresholds are required to pay income tax on upwards to fifty percent of their Social Security benefit income. Ten years later, the Autobus Budget Reconciliation Act of 1993 (OBRA 93, Public Law103-66) established an additional higher threshold, above which upwardly to 85 percent of Social Security benefits are taxable. The 1983 amendments crave beneficiaries to pay income tax on their benefits if their modified adapted gross income (AGI)—which includes one-half of Social Security benefit income—is greater than $25,000 for single beneficiaries and $32,000 for married couples (Table i).ii,3 Specifically, beneficiaries who file taxes singly must count every bit taxable income the bottom of one-half of the amount by which modified AGI exceeds $25,000 or i-one-half of their do good income. Married beneficiaries filing joint income tax returns are required to count as taxable income the bottom of one-half of the corporeality by which modified AGI exceeds $32,000 or one-half of their benefit income.4 Prior to OBRA 93, all of the revenue raised from taxing Social Security benefits was credited to the One-time-Age, Survivors, and Disability Insurance Trust Funds.
| Line | Modified AGI (nominal $) | Taxable portion of income |
|---|---|---|
| Unmarried | ||
| 1 | Less than 25,000 | None |
| 2 | 25,000–34,000 | Lesser of—
|
| 3 | More than 34,000 | Bottom of—
|
| Married, filing jointly | ||
| 4 | Less than 32,000 | None |
| 5 | 32,000–44,000 | Bottom of—
|
| 6 | More than than 44,000 | Lesser of—
|
| SOURCE: IRS (2015b). | ||
| NOTE: Modified AGI is AGI plus nontaxable interest income plus income from strange sources plus half of Social Security benefits. | ||
OBRA 93 established the 2d income thresholds of $34,000 of modified AGI for beneficiaries filing income tax singly and $44,000 of modified AGI for married beneficiaries filing jointly. Although benefit income for tax filers with modified AGI beneath those thresholds remains taxable co-ordinate to the terms of the 1983 amendments, upwards to 85 percent of Social Security benefits are taxable for beneficiaries with modified AGI exceeding the new thresholds.v The additional revenue generated past increasing the maximum taxable proportion of benefits above the 2nd threshold from fifty percent to 85 percent is credited to the Medicare Hospital Insurance Trust Fund.
The income tax treatment of Social Security benefits shown in Table 1 summarizes information available in a current Internal Acquirement Service (IRS) taxpayer guide. The income thresholds and taxable proportions set forth in the 1983 amendments and modified under OBRA 93 remain in effect today. Considering the taxable-income thresholds are non indexed to changes in prices or wages in the national economy, the taxable proportion of aggregate do good income has risen over time.
A worker's payroll tax contributions to Social Security in a given year are included in his or her taxable income for that year. In other words, workers pay income revenue enhancement on the payroll tax. The 1983 amendments adopted the principle that beneficiaries should not pay income tax on the portion of do good income that equals their previously taxed contributions. The principle of excluding from taxation an employee'due south previously taxed contributions besides applies to pensions and annuities.six
The 1983 amendments limited the taxable proportion of benefits to l percent because employees pay half of the payroll tax, and their payroll tax contributions were already included in taxable income for before years.7 Withal, although the worker pays one-half of the payroll tax, a typical worker'due south lifetime payroll tax contributions corporeality to much less than half of his or her lifetime Social Security benefits. In 1993, SSA'southward Role of the Main Actuary estimated that the payroll tax contributions of current and time to come workers would equal less than 15 percent of the nowadays value of their lifetime benefits (Goss 1993). Therefore, if the ratio of lifetime contributions to benefits is less than 15 percent, and so up to 85 percent of benefit income can be taxed without risk of double taxation. On that basis, OBRA 93 increased the maximum taxable portion of Social Security benefits from 50 percent to 85 percentage for beneficiaries whose modified AGI exceeds the 2d (higher) threshold specified in that police force. OBRA 93 did not change the taxable portion of benefits between the first and second income thresholds, which continues to be 50 percent. For beneficiaries with income beneath the first threshold, all benefits proceed to be taxation-exempt.
In its January 1983 written report, the National Committee on Social Security Reform estimated that near 10 percent of Social Security beneficiaries would pay income taxation on their benefits if half of benefits were taxable for "persons with Adjusted Gross Income (earlier including therein any [Social Security] benefits) of $20,000 if unmarried and $25,000 if married" (emphasis added). The 1983 Amendments to the Social Security Act set the income thresholds for taxation of benefits at $25,000 for single persons and $32,000 for married couples (with income including one-half of Social Security benefits). Thus, the income thresholds Congress established for revenue enhancement of benefits were higher than those recommended past the Commission, but the upshot of the college thresholds was partly offset by requiring taxpayers to include half of their Social Security benefits in the income computations.
When the 1983 amendments went into issue, nearly 8 per centum of beneficiary families were required to pay income tax on office of their Social Security benefits (House Ways and Ways Commission 2004). That percentage has increased over time considering the 1983 amendments set the thresholds for taxation of benefits in nominal dollars, rather than indexing them to price or wage changes in the national economic system.8 By 1993, an estimated 20 percent of beneficiary families paid income tax on part of their benefits (Pattison and Harrington 1993). Subsequent estimates by the Congressional Budget Office (CBO) put the percentage of beneficiaries paying income tax on their benefits at 25 percent in 1997, 32 percentage in 2000, and 39 per centum in 2003. More recently, CBO estimated that 49 per centum of Social Security beneficiaries paid income tax on their benefits in 2014 and that their boilerplate tax payment equaled half-dozen.vii percentage of benefit income, although "less than thirty percentage of all Social Security benefits paid out in 2014 were bailiwick to income tax" (Shakin and Seibert 2015). The authors also projected that more than 9 pct of benefits will be owed as income revenue enhancement past 2039.
Although the percentage of families that pays income revenue enhancement on Social Security benefits has risen, not all casher families are required to file an income tax return, and not all beneficiaries who file a return owe income tax on their benefits. Individuals and married couples must file a tax return only if their taxable income exceeds the sum of the standard deduction and personal exemption amounts in effect for that year.nine For case, in 2016, a single person younger than historic period 65 will have to file a federal income tax return simply if his or her 2015 income from nontax-exempt sources exceeds $10,300. For married couples in which both spouses are younger than historic period 65, the income threshold for filing a revenue enhancement return for 2015 will be $xx,600. Single persons aged 65 or older will take to file a tax return in 2016 simply of they take 2015 income of more than than $11,850. Married couples in which both spouses are 65 or older will take to file a revenue enhancement return simply if their 2015 income exceeds $23,100.
Data and Methods
The MINT microsimulation model was used to estimate the proportion of Social Security beneficiary families that volition owe federal income taxation on their benefits and the percentage of benefit income they will owe as income taxation over the catamenia 2010–2050. Microsimulation models utilise data almost a sample of "micro units" such every bit individuals, families, or households to guess how changes in their characteristics or behavior will affect the entire population or a selected subgroup such as workers or retirees. These models are widely used past federal agencies to analyze the distributional effects of public policy proposals. In improver to SSA, agencies such as the Department of Agriculture, the Department of Health and Man Services, CBO, the Congressional Enquiry Service, and the Authorities Accountability Part have used microsimulation models in contempo years to gauge the effects of policy proposals on beneficiaries of federal programs. Smith and Favreault (2013) observe that microlevel data, when "combined with detailed representations of plan rules, can inform policy by revealing interactions and trends that more aggregate analyses may fail to capture."
MINT links demographic data from the Demography Bureau'southward Survey of Income and Program Participation (SIPP) to Social Security earnings records to simulate the furnishings of alternative policy and economic scenarios on individual and family income. The MINT income tax reckoner statistically matches the records for individual SIPP respondents with similar records in the IRS Statistics of Income information file. The projections in this newspaper utilize MINT version 7 (MINT7). MINTseven simulates federal income tax liability based on income revenue enhancement parameters in upshot through 2013, including the provisions of the American Taxpayer Relief Act of 2012 (Public Law112-240).
MINT7 simulations brainstorm with a representative sample of the noninstitutionalized U.Southward. adult resident population born after 1925, based on records from the 2004 and 2008 SIPP panels that take been matched to Social Security earnings records through 2010.ten Adjusted by sample weights, the casher population modeled past MINT7 represents 54.iii million persons in 2015. That number is equal to 92 per centum of the monthly boilerplate of 59.0 million persons who received benefits from January through June 2015. Beneficiaries omitted from the MINT7 sample include those born before 1926, children, disabled individuals aged 30 or younger, and nursing home residents.11
The Internal Revenue Code requires the income brackets to which each marginal tax rate applies to be indexed to annual price inflation, as measured by the Consumer Price Alphabetize. If tax brackets continue to be indexed to prices, taxes as a share of national income will ascent substantially. Consequently, long-term estimates of income taxes must assume either that the income revenue enhancement will one solar day consume a larger pct of national income than information technology does today or that Congress will act to prevent such an increase past adjusting the brackets upwardly.
MINT7 simulations assume that Congress will act to keep the proportion of national income paid as income revenue enhancement from rising substantially above its long-term historical boilerplate. Specifically, MINT models the current tax policy of price indexing through 2023 and assumes a switch to wage indexing using the national average wage alphabetize (AWI) thereafter.12 This is a critical assumption considering over time, wages—which are the largest single source of income—tend to rise faster than prices as labor productivity increases. For example, the Social Security Lath of Trustees states that over the period from 1967 through 2007, wages grew faster than prices past an boilerplate of 0.9 percent points per year. The Board also assumes that the average rate of growth of wages will exceed the average rate of cost inflation by about one.1 percentage points over the next 75 years (Board of Trustees 2014).
MINT simulates tax-filing units, which in most cases are either single individuals or married couples filing joint tax returns.xiii For simplicity, all tax-filing units that include at least one Social Security beneficiary are called "casher families," regardless of whether the unit is a single person or a married couple in which one or both spouses receive Social Security benefits.
MINT Simulation Results
This section discusses the projected prevalence and relative corporeality of income tax liability on Social Security benefit income, based on the MINT7 simulations. The charts and tables illustrate broad trends by showing the projections in 5-year intervals (quinquennially).
Casher Families Filing a Tax Return and Owing Income Tax on Benefits
Chart 1 shows the projected percentage of Social Security casher families that will file a tax return and the pct that will owe income tax on their benefits over the period 2010–2050. MINT projects that about 72 per centum of beneficiary families will file an income revenue enhancement render through 2030, afterward which the proportion will fall slowly to about 68 pct by 2050. The decline later 2030 reflects assumptions of both a change from cost indexing to wage indexing for revenue enhancement brackets after 2023 and a reduction in the rate of growth in retirement income from pensions and other non–Social Security sources.
Chart ane.
Percentages of Social Security beneficiaries filing income revenue enhancement returns and owing income taxation on their benefits, 2010 and projected quinquennially 2015–2050
SOURCE: Writer'southward calculations using MINT7.
As noted earlier, some beneficiaries who file income tax returns do not pay taxes on their benefits because their modified AGI does not exceed the taxable threshold. MINT projects that the proportion of beneficiary families that will owe income tax on their benefits will increase from about 47 percent in 2010 to 52 per centum in 2015 and to 58 pct in 2030, so will fall slightly to nigh 56 percent by 2050. Here too, the projected decline after 2030 reflects the supposition of both the alter from price indexing to wage indexing for taxation brackets and a slowing rate of growth in retirement income from nonbenefit sources.
Share of Benefits Paid as Income Tax
Chart 2 shows the projected hateful percentage of Social Security benefits paid as income taxation by three beneficiary-family unit groups: all such families; families that file a taxation return; and families that owe whatever income tax on their benefits. Among all beneficiary families, MINT projects that the hateful percentage of do good income owed as income tax will increase from 6.four percent in 2010 to 7.2 per centum in 2015, to nine.7 pct in 2030, and to x.9 percent by 2050. Because the income thresholds for revenue enhancement of benefits are fixed in nominal dollars, long-term growth in total income will result in a rising share of benefits being paid as income tax, fifty-fifty if revenue enhancement code parameters currently indexed to cost aggrandizement are instead indexed to wage growth in the future.
Chart 2.
Hateful per centum of Social Security do good income owed equally income tax: Three beneficiary-family categories, 2010 and projected quinquennially 2015–2050
SOURCE: Writer's calculations using MINTseven.
For beneficiary families that must file a revenue enhancement return (regardless of whether they owe income taxes on their benefits), MINT projects the mean percentage of benefits owed as income tax to increase from eight.2 per centum in 2010 to 9.2 percent in 2015 and to 12.ii percentage in 2030. By 2040, casher families that file tax returns volition owe an average of 12.9 percent of their benefits equally income tax.
For casher families that must pay income tax on their benefits, MINT projects that the hateful pct of benefit income owed equally income revenue enhancement will increment from eleven.7 percent in 2010 to xi.9 percent in 2015 and to 12.two percent in 2030. By 2050, MINT projects that families that owe any tax on their benefits volition owe 14.7 percent of their benefits as income taxation on average.
Median Percentage of Benefits Owed as Income Tax
Taxes due for the typical beneficiary family are perhaps best represented by the median percentage of benefits owed as income tax. The median lies at the midpoint of the distribution, with equal numbers of families having higher and lower percentages due. Chart three shows the projected median per centum of benefits owed equally income tax among beneficiary families in the same three groups represented in Nautical chart 2.
Chart 3.
Median pct of Social Security benefit income owed equally income tax: Three casher-family categories, 2010 and projected quinquennially 2015–2050
SOURCE: Writer's calculations using MINTseven.
Amidst all beneficiary families, the median percent of Social Security benefits owed every bit income taxation was zero in 2010 and is projected to be just 0.5 percentage in 2015. The median income revenue enhancement liability on Social Security benefits amid all beneficiary families will rise to 4.8 percent in 2030 and will then remain relatively stable over the post-obit xx years.
Amid families that file a tax return, the median percent of benefits paid as income tax was half dozen.vi percent in 2010 and will be vii.7 per centum in 2015. MINT projects that percentage to rise to nine.9 per centum in 2030 and to 10.3 pct past 2050.
Amidst beneficiary families that owe any income tax on their benefits, the median percentage of benefits owed every bit income taxation was 10.4 percent in 2010 and will rise to 11.1 percent in 2015. MINT projects that share to reach 12.ane pct in 2025 so to remain stable over the following 25 years. The percentage of benefits owed as income tax will stabilize because most families that owe income tax on their benefits will be in the 15 per centum marginal income tax subclass, and about of them will be paying taxes on the maximum 85 percent of benefits.
Do good Income Owed as Income Revenue enhancement In a higher place and Beneath the Median
Some casher families owe considerably more than or less than the median percent of their benefits in taxes. As Nautical chart 1 shows, 56–58 percentage of beneficiary families volition owe some income tax on their benefits over the side by side several decades. Conversely, 42–44 per centum of beneficiary families will owe no income tax on their Social Security benefits in whatever given year, again assuming that revenue enhancement brackets will exist indexed to wages rather than prices afterward 2023.
Nether current police force, the highest percentage of Social Security benefits that whatsoever family pays as income tax is 33.7 percent. That figure represents the production of the maximum proportion of benefit income that is taxable (85 percent) and the highest marginal income taxation rate (39.6 percent). In 2015, the 39.vi percent marginal revenue enhancement rate applies to taxable income above $411,200 for single persons and to taxable income above $464,850 for married couples filing articulation returns. MINT projects that less than 1 percent of beneficiaries will owe 33.7 percentage of their benefits every bit income tax in 2015 or in whatsoever year through 2050 (not shown). In 2015, an estimated 80 percent of beneficiaries filing singly and 79 percent of married couples filing jointly are in either the 15 percent or 25 percent marginal tax brackets (Table 2).
| Marginal taxation rate (%) | Filing status | |
|---|---|---|
| Single | Married, filing jointly | |
| Total | 100.0 | 100.0 |
| 10.0 | 5.seven | 4.9 |
| xv.0 | 36.0 | 42.9 |
| 25.0 | 43.ix | 35.nine |
| 28.0 | 11.0 | 8.0 |
| 33.0 | 3.1 | six.1 |
| 35.0 | a | 0.7 |
| 39.6 | a | 1.five |
| SOURCE: Writer's calculations using MINT7. | ||
| NOTE: Data are for the 52 percent of casher families estimated to owe tax on their benefits. | ||
| a. Less than 0.5 percent. | ||
In addition to the median percentage of benefit income owed every bit income revenue enhancement by casher families, Chart 4 shows the 90th-, 75th-, and 25th-percentile values. The chart covers all beneficiary families, including those that owe no income revenue enhancement on their Social Security benefits. Beneficiary families at the 90th percentile of income taxation liability on Social Security benefits paid 15.0 percentage of their benefits as income tax in 2010; those families will owe 16.1 pct of their benefits equally income tax in 2015 and about 17 per centum in afterward years. Beneficiary families at the 75th percentile of income tax liability paid 9.7 percent of their benefits as income tax in 2010. MINT projects that those families will owe 11.4 per centum of their benefits as income tax in 2015 and about thirteen per centum over the period 2025–2050. The median per centum of benefit income due as income revenue enhancement among all beneficiary families is represented by the blueish line, which duplicates the blue line in Nautical chart 3, described earlier. Families at the 25th and lower percentiles of tax liability paid no income taxation on their Social Security benefits in 2010, and MINT projects that they will not exist required to pay income taxation on their Social Security benefits at any fourth dimension in the menstruum 2015–2050.
Chart four.
Percentage of Social Security benefit income that is owed equally income taxation among beneficiary families: Selected percentiles, 2010 and projected quinquennially 2015–2050
SOURCE: Author'south calculations using MINT7.
Do good Income Owed as Income Taxation by Full-Income Quartile
Because of the progressivity of income tax rates, higher-income families owe college percentages of their Social Security benefits as income taxation than do lower-income families. For case, a beneficiary family with income in the highest quartile pays a larger percent of its benefits equally income tax than does a family in the everyman quartile. For each successive quartile, from lowest to highest, the projected percentages should increase.
To provide a consequent footing for comparison income over fourth dimension, MINT projects the amounts that volition define the income-quartile boundaries amidst beneficiary families from 2010 to 2050, and expresses them relative to the national AWI (Table 3). For example, among beneficiary families in 2010, a family with total income equal to at least 2.273 times the national AWI was in the 4th (highest) income quartile. A beneficiary family was in the third income quartile in 2010 if it had income betwixt ane.223 and ii.273 times the AWI. A beneficiary family with income betwixt 0.624 and i.223 times the AWI was in the 2nd income quartile, and a casher family with income of less than 0.624 times the AWI was in the first (lowest) income quartile.
| Year | National AWI (nominal $) | Total family income relative to national AWI | ||
|---|---|---|---|---|
| 75th percentile | Median | 25th percentile | ||
| 2010 | 41,674 | 2.273 | ane.223 | 0.624 |
| 2015 | l,893 | ii.246 | 1.201 | 0.590 |
| 2020 | 63,676 | 2.235 | 1.165 | 0.567 |
| 2025 | 76,831 | ii.229 | ane.162 | 0.572 |
| 2030 | 93,193 | 2.179 | 1.120 | 0.549 |
| 2035 | 113,228 | two.133 | ane.089 | 0.537 |
| 2040 | 137,642 | two.080 | one.043 | 0.524 |
| 2045 | 167,076 | two.005 | ane.000 | 0.506 |
| 2050 | 202,452 | one.942 | 0.959 | 0.490 |
| SOURCE: Author's calculations using MINT7. | ||||
Chart 5 shows MINT projections of the mean percentage of benefits paid as income tax by beneficiary families in each total-income quartile. Total income consists of pretax greenbacks income from all sources, including the estimated amount a family would receive if it used its financial assets to purchase an annuity. Beneficiary families in the quaternary income quartile paid 13.ix percent of their benefits as income tax, on average, in 2010. MINT projects that families in the fourth income quartile will owe xiv.0 percent of their benefits every bit income tax in 2015 and fourteen.8 per centum in 2020. From 2030 through 2050, MINT projects that families in the fourth income quartile volition owe about 16 percent of their benefits as income tax.
Chart five.
Hateful percentage of Social Security benefit income owed as income revenue enhancement among casher families, by total-income quartile: 2010 and projected quinquennially 2015–2050
SOURCE: Author'southward calculations using MINTvii.
On boilerplate, beneficiary families in the third income quartile paid 5.0 per centum of their benefits as income taxation in 2010. MINT projects that those beneficiary families will owe half-dozen.9 percent of benefits as income tax in 2015 and 8.6 percent in 2020. Over the period 2025–2050, MINT projects that beneficiary families in the third income quartile volition owe an average of about ten percent of their Social Security benefits in income taxes.
Casher families in the lower half of the income distribution pay a essentially lower proportion of their benefits every bit income tax than do those with income above the median. Families in the second income quartile paid less than 0.5 percent of their benefits as income tax in 2010 and they will owe 1.1 per centum of their benefits equally income tax in 2015. That proportion will rising to 3.3 percent in 2030 and by 2050, MINT projects that families in the second income quartile volition owe 4.three percent of their Social Security benefits in income tax. Families in the lowest quartile paid no income tax on their benefits in 2010. MINT projects that those families will owe just 1.i pct of benefits as income tax by 2050.
In contrast with Chart 5's mean percentages, Chart six shows the median percentages of benefits paid as income tax past beneficiary families inside each income quartile. A family in the fourth income quartile paid a median of 12.four percent of its benefits as income tax in 2010 and is projected to owe 13.ii percentage in 2015 and well-nigh 14 percent thereafter. A family in the tertiary income quartile paid a median of 3.seven percent of its benefits as income tax in 2010 and is projected to owe 7.one pct in 2015 and between 9 percent and 11 percent from 2025 through 2050. MINT projects that the median revenue enhancement liability for families in the second and commencement income quartiles volition exist zero throughout the period 2010–2050.
Chart 6.
Median per centum of Social Security benefit income owed as income tax among casher families, by total-income quartile: 2010 and projected quinquennially 2015–2050
SOURCE: Author's calculations using MINT7.
a. Because the projected median percentages for casher families in the second income quartile are zero in every year, the projected median percentages for beneficiary families in the beginning income quartile are necessarily also zero in all years.
Determination
Social Security benefits were first subject to income tax in 1984 and since and then, the proportion of casher families whose benefits are taxed has increased from less than i in x to more than one-half. SSA's MINT microsimulation model, containing data on about 92 percent of Social Security beneficiaries, projects that 52 per centum of beneficiary families will pay income tax on their Social Security benefits in 2015. The median taxation payment amid all casher families will equal less than i percent of benefit income in 2015; but amid only those families whose benefits are taxable, the median income tax payment will equal xi.1 percent of Social Security benefits. By 2030, MINT projects that 58 percent of beneficiary families will owe income taxation on their Social Security benefits and that the median income tax payment will equal nearly 5 percent of their benefit income. Among families that owe income taxation on their benefits, the model projects a median payment equal to 12 percent of benefit income in 2030. These estimates are based on the assumption that Congress will amend provisions of the Internal Acquirement Lawmaking that currently crave tax-bracket adjustments based on price indexing; such amendments would clinch that the proportion of income paid as income tax would remain shut to its current level. Otherwise, the percentage of Social Security benefits that volition be owed as income tax will exceed the level that MINT has projected.
Because the progressivity of the federal income tax assures that higher-income beneficiaries pay the about taxes, the tax of benefits reduces the net Social Security income received by higher-income beneficiaries. In that respect, taxing Social Security benefits has the same outcome that a means test would have, without the authoritative cost that straight means testing would entail (Goodman and Liebman 2008).xiv Means tests are constructive for targeting benefits to persons who are most in need, merely they can be expensive to administer. In 2014, for example, federal expenditures for the Supplemental Nutrition Assistance Program (SNAP) were $76 billion. Of that amount, 4.9 percent ($3.vii billion) went to administrative expenses, including means testing. Based on total Social Security expenditures of $851 billion in fiscal year 2014, each percentage bespeak in hypothetical expenditures needed to institute means testing would heighten almanac Social Security plan spending by more than $viii.v billion.
Because Congress established income thresholds below which Social Security benefits are taxation-exempt, benefit income continues to be taxed less heavily than income from annuities and pensions. Individuals with modified AGI of less than $25,000 and married couples with modified AGI of less than $32,000 pay no income revenue enhancement on their Social Security benefit income. Because those income thresholds are not indexed to prices or wages, the proportion of beneficiaries who pay taxes on their benefits has increased over time. Somewhen, the taxation of Social Security benefits will be roughly equivalent to the current-law taxation of pensions and annuities—which, according to the legislative history of the 1983 amendments, was Congress' intent when it set the threshold for tax of benefits in nominal dollars.
Notes
1 From 1950 through 2012, the ratio of income taxes to personal income averaged 9.v percent per year. The annual ratio was never lower than 7.2 pct or greater than 11.vi pct (IRS 2014).
2 For most taxpayers, modified AGI equals AGI plus tax-exempt interest income, income from foreign sources, and half of Social Security benefits.
3 Special rules utilise to heads of households (single parents) and married couples filing separately. Consummate rules for counting Social Security and Tier ane Railroad Retirement benefits as taxable income are included in IRS (2015a).
4 Pattison and Harrington (1993) draw the origins of both the income thresholds at which Social Security benefits become taxable and the percentage of benefits subject to income tax.
5 Pattison (1994) describes the 1993 provisions that increased the tax of Social Security benefits.
6 Co-ordinate to IRS instructions, "if you paid office of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity y'all receive that represents a return of your cost. The rest of the amount y'all receive is generally taxable" (IRS 2015b, 77).
7 As of 2015, a worker pays a Social Security payroll tax of 6.two percent on earnings up to $118,500. The worker's employer pays an equal amount, which is a tax-deductible business expense. Cocky-employed workers are liable for the full 12.4 pct payroll taxation, but they are eligible for ii tax deductions: They may reduce their net earnings from self-employment by half the amount of the Social Security payroll tax, and they can deduct half of their Social Security revenue enhancement from personal income reported on IRS Course 1040. The payroll tax deduction is a factor in determining AGI (SSA 2015a).
viii The selection of nominal-dollar thresholds was deliberate, and then that somewhen the tax treatment of Social Security income would be like to that of pensions and annuities (Senate Finance Committee 1993).
9 Taxable income consists mainly of wages and salaries, interest, dividends, hire, royalties, capital gains, income from the auction of goods or holding, income from a subcontract or concern, annuities, pensions, alimony, unemployment compensation, and distributions from retirement accounts other than qualified Roth distributions.
10 For the 2004 SIPP panel, 88 percent of survey records were matched to their Social Security earnings records. The match rate for the 2008 panel was more than 90 pct. Characteristics of birth cohorts later 1979 are simulated rather than being based on SIPP records.
xi MINT simulations for 2020 and later reflect samples that are successively more representative of the full population of aged beneficiaries, equally members of birth cohorts from 1925 or earlier are replaced by members of afterward cohorts over time.
12 Results would exist similar if the assumed date of the switch to wage indexing were a few years earlier or after. For a description of the national AWI, see https://www.socialsecurity.gov/oact/cola/AWI.html.
13 For 2015, MINT simulates the distribution of beneficiary units to exist 21 pct filing singly, l per centum married couples filing jointly, i per centum filing every bit the head of a household, and 28 percent not filing a tax render.
14 Means tests limit eligibility for government-provided benefits or reduce the amount of the do good for individuals who have income or avails above thresholds fix in constabulary. Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Help Program (SNAP), Supplemental Security Income (SSI), and Medical Assist (Medicaid) are means-tested programs. Social Security and Medicare, as social insurance programs funded largely by payroll taxes levied on workers and their employers, are not means tested, although Medicare Part B (supplemental medical insurance) and Part D (prescription drug coverage) both charge income-related premiums to participants.
References
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Source: https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
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