Summary and Introduction
| Abbreviation | Definition |
|---|---|
| AGI | Adjusted Gross Income |
| AWI | Average Wage Index |
| CBO | Congressional Budget Office |
| IRS | Internal Revenue Service |
| MINT | Modeling Income in the Near Term |
| OBRA 93 | Omnibus Budget Reconciliation Act of 1993 |
| SIPP | Survey of Income and Program Participation |
| SSA | Social Security Administration |
Since 1984, a portion of Social Security benefits has been subject to federal income tax for beneficiaries whose total income surpasses specific thresholds. These initial thresholds, set in nominal dollars, have remained largely unchanged, while average wages have significantly increased. This disparity has led to a growing percentage of Social Security recipients being required to pay income tax on their benefits over the decades. This article delves into how income tax tiers have evolved over time, particularly under different presidential administrations, and analyzes the resulting impact on the taxation of Social Security benefits. We will explore how these changes in tax policy, coupled with fixed income thresholds for Social Security benefit taxation, have led to an increasing number of retirees facing taxes on their benefits. Understanding these trends is crucial for beneficiaries and policymakers alike, as it sheds light on the long-term financial landscape of retirement and the interplay between social security and federal income tax policies.
This analysis will utilize projections from the Social Security Administration’s (SSA) Modeling Income in the Near Term (MINT) model to illustrate the increasing proportion of beneficiary families expected to owe federal income tax on their benefits. We will examine the predicted percentage of beneficiary families affected and the average proportion of their benefit income owed as income tax in selected years from 2015 to 2050, drawing comparisons with data from 2010. While state-level taxation of Social Security income exists in some regions, this paper will primarily focus on federal income taxes and how the structure of federal income tax tiers influences the taxation of these benefits.
In essence, MINT projections indicate that an average of approximately 56 percent of beneficiary families will be liable for income tax on their benefits annually between 2015 and 2050. For 2015, the model estimates a median of less than 1 percent of benefits owed as income tax for beneficiary families overall, although for families who do owe tax, this percentage rises significantly. The median percentage of benefits owed as income tax by beneficiary families is projected to increase to around 5 percent throughout the projection period. Among the estimated 52 percent of families expected to pay federal income tax on their Social Security benefits in 2015, the median share of benefits owed as tax is projected to be 11 percent, remaining near 12 percent from 2020 to 2050.
Long-term projections of taxation necessitate certain assumptions regarding future tax policy. Current law dictates that income tax brackets are adjusted annually for inflation using the Consumer Price Index. However, historically, income growth has outpaced inflation due to increasing labor productivity. If tax brackets continue to be solely inflation-indexed, the portion of benefit income paid as taxes will likely exceed historical averages. Therefore, long-term tax projections must consider either the continuation of price-indexed tax brackets or potential Congressional adjustments to increase these brackets. The estimates presented here are based on the critical assumption that Congress will act before 2025 to adjust tax-bracket thresholds upwards, with MINT assuming a shift from price indexing to wage indexing after 2023. Should tax brackets remain indexed to prices indefinitely, the proportion of Social Security benefit income taxed would be higher than these projections, particularly in years beyond 2023.
It is also important to note that these estimates are specific to Social Security beneficiaries included in the MINT model, representing approximately 92 percent of the total beneficiary population in 2015. This difference between MINT simulations and administrative estimates from other federal agencies is mainly attributed to income characteristics of beneficiaries not included in the model. Furthermore, MINT simulations reflect scheduled benefits under current law. Given the Social Security Board of Trustees’ projection of trust fund depletion by 2034, necessitating Congressional action, the long-term sustainability of scheduled benefits and the timing of any potential changes remain uncertain.
Background: Evolution of Income Tax Tiers and Social Security Taxation
The taxation of Social Security benefits is intrinsically linked to the broader history and evolution of the federal income tax system in the United States, particularly the structure of income tax tiers and how they have been adjusted over time under different administrations.
Federal income tax in the U.S. began in 1913 with the ratification of the 16th Amendment, establishing a progressive tax system with initially low rates and few tiers. Over the decades, the income tax system has undergone numerous transformations, influenced by economic conditions, political ideologies, and the fiscal needs of the government.
Early Income Tax Systems and the Pre-1984 Era
The early income tax system featured varying numbers of tax brackets and rates, often adjusted in response to events like World War I and the Great Depression. However, Social Security benefits, which began in 1940, were explicitly exempt from federal income tax until 1984. This exemption was based on Treasury Department rulings in 1938 and 1941, establishing Social Security benefits as tax-free. This was in contrast to other forms of retirement income, such as pensions, which were taxable.
The 1983 Social Security Amendments: Introducing Taxation
By the late 1970s and early 1980s, policymakers began to reconsider the tax-exempt status of Social Security benefits. Both the 1979 Advisory Council on Social Security and the National Commission on Social Security Reform in 1983 recommended subjecting a portion of Social Security benefits to income tax, aiming to address the program’s financial challenges and align its tax treatment more closely with other retirement income sources.
The Social Security Act Amendments of 1983 (Public Law 98-21) marked a significant shift by introducing the taxation of Social Security benefits for beneficiaries with incomes exceeding specific thresholds. This legislation stipulated that beneficiaries whose total annual income surpassed certain levels would be required to pay income tax on up to 50 percent of their Social Security benefit income. The thresholds set in 1983 were $25,000 for single filers and $32,000 for married couples filing jointly (as detailed in Table 1). These thresholds were not indexed to inflation or wage growth, a critical factor that would lead to an increasing proportion of beneficiaries being subject to taxation over time as wages rose while the thresholds remained static in nominal terms.
The 1993 Omnibus Budget Reconciliation Act (OBRA 93): Expanding Taxation
A decade later, the Omnibus Budget Reconciliation Act of 1993 (OBRA 93, Public Law 103-66) further expanded the taxation of Social Security benefits. OBRA 93 introduced a second, higher income threshold, above which up to 85 percent of Social Security benefits became taxable. These higher thresholds were set at $34,000 for single filers and $44,000 for married couples filing jointly. While the initial 50 percent taxable portion remained for those between the lower and higher thresholds, this second tier significantly increased the tax burden on higher-income beneficiaries. Revenue generated from taxing the additional 35 percent (from 50% to 85%) was specifically directed to the Medicare Hospital Insurance Trust Fund.
Table 1. Taxable Portions of Income for Social Security Beneficiaries, by Income Tax Filing Status and Modified AGI
| Line | Modified AGI (nominal $) | Taxable Portion of Income |
|---|---|---|
| Single | ||
| 1 | Less than 25,000 | None |
| 2 | 25,000–34,000 | Lesser of: – 50% of benefit income; or – modified AGI in excess of $25,000 |
| 3 | More than 34,000 | Lesser of: – 85% of benefit income; or – amount from line 2 plus 85% of modified AGI in excess of $34,000 |
| Married, Filing Jointly | ||
| 4 | Less than 32,000 | None |
| 5 | 32,000–44,000 | Lesser of: – 50% of benefit income; or – modified AGI in excess of $32,000 |
| 6 | More than 44,000 | Lesser of: – 85% of benefit income; or – amount from line 5 plus 85% of modified AGI in excess of $44,000 |
SOURCE: IRS (2015b).
NOTE: Modified AGI is AGI plus nontaxable interest income plus income from foreign sources plus one-half of Social Security benefits.
These income thresholds and the taxable proportions established in 1983 and modified in 1993 remain in effect today. Crucially, because these income thresholds are not indexed to inflation or wage growth, the taxable proportion of aggregate benefit income has steadily increased over time. This “bracket creep” effect, where nominal thresholds remain fixed while incomes rise, is a key element in understanding the growing taxation of Social Security benefits.
Income Tax Tiers and Different Administrations: A Broad Overview
Examining income tax tiers over time and across different administrations provides context for understanding the policy environment in which Social Security benefit taxation evolved. While a detailed analysis of every administration is beyond the scope of this article, highlighting key periods and trends is informative.
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Reagan Administration (1981-1989): The Reagan era saw significant tax cuts, most notably the Economic Recovery Tax Act of 1981, which dramatically reduced marginal income tax rates and simplified tax brackets. While these broader tax reforms were occurring, the 1983 Social Security Amendments, implementing the initial taxation of benefits, were also enacted.
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Clinton Administration (1993-2001): The Clinton administration passed OBRA 93, which, in addition to establishing the higher tier of Social Security benefit taxation, also increased income tax rates for higher earners. This period reflects a combination of expanding Social Security taxation while also adjusting broader income tax tiers.
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Bush Administration (2001-2009): The Bush administration implemented significant tax cuts in 2001 and 2003, reducing income tax rates and altering tax brackets. These cuts were framed as stimulating economic growth. However, the underlying structure of Social Security benefit taxation remained unchanged during this period.
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Obama Administration (2009-2017): The Obama administration oversaw temporary tax cuts to stimulate the economy following the 2008 financial crisis, but also allowed some Bush-era tax cuts to expire, leading to higher income tax rates for top earners. The Affordable Care Act also introduced new taxes on higher-income individuals. Again, the Social Security benefit taxation structure remained largely untouched.
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Trump Administration (2017-2021): The Tax Cuts and Jobs Act of 2017 significantly altered the income tax landscape, reducing corporate and individual income tax rates, and modifying income tax brackets. While these changes were substantial for the overall income tax system, they did not directly modify the thresholds or percentages related to Social Security benefit taxation.
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Biden Administration (2021-Present): The Biden administration has proposed tax increases for corporations and high-income individuals, but as of yet, there have been no major changes to the structure of income tax tiers or the taxation of Social Security benefits.
This brief overview demonstrates that while income tax tiers and rates have been subject to considerable change under different administrations, often reflecting differing economic philosophies and priorities, the specific rules governing the taxation of Social Security benefits have remained remarkably consistent since the 1983 and 1993 amendments. The lack of indexation of the Social Security benefit taxation thresholds, in the context of fluctuating broader income tax policies, has been a key driver in the increasing proportion of beneficiaries facing taxation.
Data and Methods: MINT Microsimulation Model
The projections presented in this analysis are generated using the Social Security Administration’s (SSA) Modeling Income in the Near Term (MINT) microsimulation model, specifically MINT version 7 (MINT7). Microsimulation models are powerful tools for analyzing the distributional effects of policy proposals by using data on a sample of “micro units” (individuals, families, or households) to estimate the impact of changes on a larger population. Federal agencies widely use these models to assess the effects of policy changes, including agencies like the Department of Agriculture, Department of Health and Human Services, Congressional Budget Office (CBO), and Government Accountability Office. As Smith and Favreault (2013) note, micro-level data combined with detailed program rules can reveal policy interactions and trends that aggregate analyses might miss.
MINT7 links demographic data from the Census Bureau’s Survey of Income and Program Participation (SIPP) to Social Security earnings records to simulate the effects of various policy and economic scenarios on individual and family income. The MINT income tax calculator statistically matches records from SIPP respondents with similar records in the IRS Statistics of Income data file. MINT7 simulates federal income tax liability based on tax parameters in effect through 2013, including provisions from the American Taxpayer Relief Act of 2012.
MINT7 simulations begin with a representative sample of the noninstitutionalized U.S. adult resident population born after 1925, drawn from the 2004 and 2008 SIPP panels matched with Social Security earnings records through 2010. This sample, adjusted by weights, represents 54.3 million beneficiaries in 2015, approximately 92 percent of the average monthly beneficiary population. Beneficiaries excluded from MINT7 include those born before 1926, children, disabled individuals under 31, and nursing home residents.
A crucial aspect of MINT7 is its assumption regarding the indexing of income tax brackets. The Internal Revenue Code mandates indexing income brackets to annual price inflation (Consumer Price Index). However, MINT7 assumes that Congress will act to prevent income taxes from consuming a substantially larger percentage of national income than historically observed. Specifically, MINT7 models current price indexing through 2023 and then assumes a shift to wage indexing using the national Average Wage Index (AWI). This assumption is critical because wages tend to grow faster than prices over time due to increasing labor productivity. For instance, the Social Security Board of Trustees notes that from 1967 to 2007, wages grew faster than prices by an average of 0.9 percentage points annually, projecting a similar trend over the next 75 years.
MINT simulates “tax-filing units,” primarily unmarried individuals or married couples filing jointly. For simplicity, all tax-filing units with at least one Social Security beneficiary are termed “beneficiary families,” regardless of marital status or the number of beneficiaries within the unit.
MINT Simulation Results: Projecting Future Trends in Social Security Benefit Taxation
The MINT7 simulations provide valuable insights into the future prevalence and magnitude of income tax liability on Social Security benefits. The following sections present key findings, focusing on projected trends in beneficiary families filing tax returns, the share of benefits paid as income tax, and the distribution of tax liability across different income levels.
Beneficiary Families Filing a Tax Return and Owing Income Tax on Benefits
Chart 1 illustrates the projected percentages of Social Security beneficiary families expected to file income tax returns and owe income tax on their benefits from 2010 to 2050. MINT projects that approximately 72 percent of beneficiary families will file tax returns through 2030, with a slight decline to about 68 percent by 2050. This decrease after 2030 reflects the model’s assumptions of a shift to wage indexing for tax brackets after 2023 and a slower growth rate in retirement income from sources other than Social Security.
Chart 1. Percentages of Social Security Beneficiaries Filing Income Tax Returns and Owing Income Tax on Their Benefits, 2010 and Projected Quinquennially 2015–2050
| Year | Filing Tax Returns | Owing Income Tax |
|---|---|---|
| 2010 | 72.0 | 47.1 |
| 2015 | 72.0 | 52.0 |
| 2020 | 71.8 | 55.6 |
| 2025 | 71.5 | 57.4 |
| 2030 | 70.6 | 57.9 |
| 2035 | 69.7 | 57.7 |
| 2040 | 69.0 | 57.5 |
| 2045 | 68.2 | 56.8 |
| 2050 | 67.5 | 56.2 |
SOURCE: Author’s calculations using MINT7.
While a significant proportion of beneficiary families file tax returns, not all owe income tax on their benefits. MINT projects that the percentage of beneficiary families owing income tax on their benefits will rise from approximately 47 percent in 2010 to 52 percent in 2015, reaching 58 percent by 2030, before slightly decreasing to around 56 percent by 2050. Similar to the trend in filing rates, this projected decline after 2030 is attributed to the assumed shift to wage indexing and slower growth in non-benefit retirement income.
Share of Benefits Paid as Income Tax
Chart 2 presents the projected mean percentage of Social Security benefits paid as income tax, categorized into three groups: all beneficiary families, families filing tax returns, and families owing income tax on their benefits. For all beneficiary families, MINT projects the mean percentage of benefit income paid as income tax to increase from 6.4 percent in 2010 to 7.2 percent in 2015, 9.7 percent in 2030, and 10.9 percent by 2050. This consistent increase is driven by the fixed nominal income thresholds for benefit taxation, leading to a larger share of benefits being taxed as total incomes rise over time, even with the assumed shift to wage indexing.
Chart 2. Mean Percentage of Social Security Benefit Income Owed as Income Tax: Three Beneficiary-Family Categories, 2010 and Projected Quinquennially 2015–2050
| Year | All Beneficiary Families | Families Filing a Tax Return | Families with Taxable Benefit Income |
|---|---|---|---|
| 2010 | 6.4 | 8.2 | 11.7 |
| 2015 | 7.2 | 9.2 | 11.9 |
| 2020 | 8.3 | 10.5 | 12.8 |
| 2025 | 9.3 | 11.7 | 13.7 |
| 2030 | 9.7 | 12.2 | 14.0 |
| 2035 | 10.1 | 12.6 | 14.3 |
| 2040 | 10.4 | 12.9 | 14.4 |
| 2045 | 10.7 | 13.3 | 14.7 |
| 2050 | 10.9 | 13.4 | 14.7 |
SOURCE: Author’s calculations using MINT7.
For beneficiary families who file tax returns, the projected mean percentage of benefits owed as income tax increases from 8.2 percent in 2010 to 9.2 percent in 2015 and 12.2 percent in 2030, reaching an average of 12.9 percent by 2040. Among families specifically owing income tax on their benefits, the mean percentage is projected to rise from 11.7 percent in 2010 to 11.9 percent in 2015 and 12.2 percent in 2030, stabilizing around 14.7 percent by 2050.
Median Percentage of Benefits Owed as Income Tax
The median percentage of benefits owed as income tax provides a more representative measure of the typical beneficiary family’s tax liability, as it is less influenced by extreme values. Chart 3 shows the projected median percentages for the same three beneficiary-family groups as in Chart 2.
Chart 3. Median Percentage of Social Security Benefit Income Owed as Income Tax: Three Beneficiary-Family Categories, 2010 and Projected Quinquennially 2015–2050
| Year | All Beneficiary Families | Families Filing a Tax Return | Families with Taxable Benefit Income |
|---|---|---|---|
| 2010 | 0.0 | 6.6 | 10.4 |
| 2015 | 0.5 | 7.7 | 11.1 |
| 2020 | 2.1 | 8.8 | 11.7 |
| 2025 | 3.9 | 9.7 | 12.1 |
| 2030 | 4.8 | 9.9 | 12.1 |
| 2035 | 5.1 | 10.2 | 12.1 |
| 2040 | 5.1 | 10.3 | 12.1 |
| 2045 | 4.8 | 10.3 | 12.1 |
| 2050 | 4.8 | 10.3 | 12.2 |
SOURCE: Author’s calculations using MINT7.
For all beneficiary families, the median percentage of benefits owed as income tax was zero in 2010, projected to be just 0.5 percent in 2015, and is expected to rise to 4.8 percent in 2030, remaining relatively stable thereafter. Among families filing tax returns, the median percentage increases from 6.6 percent in 2010 to 7.7 percent in 2015, reaching 9.9 percent in 2030 and 10.3 percent by 2050. For families owing any income tax on their benefits, the median percentage rises from 10.4 percent in 2010 to 11.1 percent in 2015, reaching 12.1 percent in 2025 and stabilizing over the subsequent 25 years. This stabilization occurs because many families owing tax will be in the 15 percent marginal income tax bracket and paying taxes on the maximum 85 percent of their benefits.
Benefit Income Owed as Income Tax Above and Below the Median
While the median provides a central tendency, it is important to consider the distribution of tax liabilities. As Chart 1 indicates, around 56–58 percent of beneficiary families are projected to owe some income tax on their benefits in the coming decades. Conversely, a significant 42–44 percent will owe no income tax, assuming wage indexing of tax brackets post-2023.
The maximum percentage of Social Security benefits taxable under current law is 85 percent, and with the highest marginal income tax rate at 39.6 percent in 2015, the highest possible percentage of benefits paid as income tax is 33.7 percent (85% * 39.6%). However, MINT projections indicate that less than 1 percent of beneficiaries will reach this maximum tax level in 2015 or any year through 2050. In 2015, the majority of beneficiaries owing tax (80% of single filers and 79% of married joint filers) are in the 15 percent or 25 percent marginal tax brackets (Table 2).
Table 2. Estimated Percentage Distribution of Beneficiary Families That Owe Income Tax, by Marginal Income Tax Rate and Filing Status, 2015
| Marginal Tax Rate (%) | Filing Status |
|---|---|
| Single | |
| Total | 100.0 |
| 10.0 | 5.7 |
| 15.0 | 36.0 |
| 25.0 | 43.9 |
| 28.0 | 11.0 |
| 33.0 | 3.1 |
| 35.0 | a |
| 39.6 | a |
SOURCE: Author’s calculations using MINT7.
NOTE: Data are for the 52 percent of beneficiary families estimated to owe tax on their benefits.
a. Less than 0.5 percent.
Chart 4 presents the 90th, 75th, 25th, and median (50th) percentile values for the percentage of benefits owed as income tax among all beneficiary families. In 2010, families at the 90th percentile paid 15.0 percent of their benefits as income tax, projected to rise to 16.1 percent in 2015 and around 17 percent in later years. Families at the 75th percentile paid 9.7 percent in 2010, projected to owe 11.4 percent in 2015 and about 13 percent from 2025 to 2050. Notably, families at the 25th and lower percentiles paid no income tax on their benefits in 2010 and are projected to continue paying no income tax throughout 2015-2050.
Chart 4. Percentage of Social Security Benefit Income That Is Owed as Income Tax Among Beneficiary Families: Selected Percentiles, 2010 and Projected Quinquennially 2015–2050
| Year | 90th Percentile | 75th Percentile | 50th Percentile (Median) | 25th Percentile |
|---|---|---|---|---|
| 2010 | 15.0 | 9.7 | 0.0 | 0.0 |
| 2015 | 16.1 | 11.4 | 0.5 | 0.0 |
| 2020 | 17.0 | 12.4 | 2.1 | 0.0 |
| 2025 | 17.6 | 13.0 | 3.9 | 0.0 |
| 2030 | 17.4 | 13.0 | 4.8 | 0.0 |
| 2035 | 17.6 | 13.0 | 5.1 | 0.0 |
| 2040 | 17.4 | 13.0 | 5.1 | 0.0 |
| 2045 | 17.5 | 13.0 | 4.8 | 0.0 |
| 2050 | 17.3 | 12.9 | 4.8 | 0.0 |
SOURCE: Author’s calculations using MINT7.
Benefit Income Owed as Income Tax by Total-Income Quartile
Due to the progressive nature of income tax rates, higher-income families pay a larger percentage of their Social Security benefits as income tax. To analyze this income-based disparity, MINT projects income-quartile boundaries for beneficiary families from 2010 to 2050, relative to the national AWI (Table 3). These quartile boundaries provide a consistent framework for comparing income levels over time.
Table 3. Quartile Boundaries for Total Income of Beneficiary Families, 2010 and Projected Quinquennially 2015–2070
| Year | National AWI (nominal $) | Total Family Income Relative to National AWI |
|---|---|---|
| 75th Percentile | ||
| 2010 | 41,674 | 2.273 |
| 2015 | 50,893 | 2.246 |
| 2020 | 63,676 | 2.235 |
| 2025 | 76,831 | 2.229 |
| 2030 | 93,193 | 2.179 |
| 2035 | 113,228 | 2.133 |
| 2040 | 137,642 | 2.080 |
| 2045 | 167,076 | 2.005 |
| 2050 | 202,452 | 1.942 |
SOURCE: Author’s calculations using MINT7.
Chart 5 shows the projected mean percentage of benefits paid as income tax by beneficiary families in each total-income quartile. In 2010, families in the highest income quartile (fourth quartile) paid an average of 13.9 percent of their benefits as income tax. This is projected to be 14.0 percent in 2015, 14.8 percent in 2020, and around 16 percent from 2030 to 2050. Beneficiary families in the third income quartile paid an average of 5.0 percent in 2010, projected to rise to 6.9 percent in 2015 and 8.6 percent in 2020, averaging around 10 percent from 2025 to 2050.
Chart 5. Mean Percentage of Social Security Benefit Income Owed as Income Tax Among Beneficiary Families, by Total-Income Quartile: 2010 and Projected Quinquennially 2015–2050
| Year | Fourth Quartile | Third Quartile | Second Quartile | First Quartile |
|---|---|---|---|---|
| 2010 | 13.9 | 5.0 | 0.5 | 0.0 |
| 2015 | 14.0 | 6.9 | 1.1 | 0.1 |
| 2020 | 14.8 | 8.6 | 2.0 | 0.1 |
| 2025 | 15.6 | 9.8 | 2.8 | 0.2 |
| 2030 | 15.7 | 9.8 | 3.3 | 0.4 |
| 2035 | 15.9 | 10.3 | 3.6 | 0.5 |
| 2040 | 15.9 | 10.2 | 3.8 | 0.6 |
| 2045 | 16.2 | 10.0 | 4.1 | 0.8 |
| 2050 | 16.1 | 10.1 | 4.3 | 1.1 |
SOURCE: Author’s calculations using MINT7.
Families in the lower half of the income distribution pay a significantly smaller proportion of their benefits as income tax. Families in the second income quartile paid less than 0.5 percent in 2010, projected to owe 1.1 percent in 2015, rising to 3.3 percent in 2030 and 4.3 percent by 2050. Families in the lowest income quartile (first quartile) paid no income tax on their benefits in 2010 and are projected to owe only 1.1 percent by 2050.
Chart 6 shows the median percentages of benefits paid as income tax within each income quartile. Families in the fourth income quartile paid a median of 12.4 percent in 2010, projected to owe 13.2 percent in 2015 and around 14 percent thereafter. Families in the third income quartile paid a median of 3.7 percent in 2010, projected to owe 7.1 percent in 2015 and between 9 percent and 11 percent from 2025 to 2050. The median tax liability for families in the second and first income quartiles is projected to remain at zero throughout 2010-2050.
Chart 6. Median Percentage of Social Security Benefit Income Owed as Income Tax Among Beneficiary Families, by Total-Income Quartile: 2010 and Projected Quinquennially 2015–2050
| Year | Fourth Quartile | Third Quartile | Second Quartile a | First Quartile a |
|---|---|---|---|---|
| 2010 | 12.4 | 3.7 | 0.0 | 0.0 |
| 2015 | 13.2 | 7.1 | 0.0 | 0.0 |
| 2020 | 13.8 | 9.3 | 0.0 | 0.0 |
| 2025 | 14.5 | 10.3 | 0.0 | 0.0 |
| 2030 | 14.3 | 10.2 | 0.0 | 0.0 |
| 2035 | 14.3 | 10.5 | 0.0 | 0.0 |
| 2040 | 14.2 | 10.3 | 0.0 | 0.0 |
| 2045 | 14.2 | 9.9 | 0.0 | 0.0 |
| 2050 | 14.2 | 9.9 | 0.0 | 0.0 |
SOURCE: Author’s calculations using MINT7.
a. Because the projected median percentages for beneficiary families in the second income quartile are zero in every year, the projected median percentages for beneficiary families in the first income quartile are necessarily also zero in all years.
Conclusion: The Growing Impact of Income Tax on Social Security Benefits
Since Social Security benefits first became subject to income tax in 1984, the proportion of beneficiary families facing taxation has increased dramatically, from less than 10 percent to over half. The SSA’s MINT model projects that in 2015, 52 percent of beneficiary families will pay income tax on their Social Security benefits. While the median tax payment among all beneficiary families is less than 1 percent of benefit income in 2015, for those families actually owing taxes, the median payment is 11.1 percent of benefits. By 2030, projections indicate that 58 percent of beneficiary families will owe income tax on their benefits, with the median tax payment rising to about 5 percent of benefit income overall, and 12 percent among those owing taxes. These projections assume Congressional action to index tax brackets to wage growth after 2023, maintaining the proportion of income paid as income tax near current levels. Without such adjustments, the percentage of Social Security benefits taxed would be even higher.
The taxation of Social Security benefits, particularly in a progressive income tax system with tiers that have evolved under different administrations, effectively functions as a means test, reducing net Social Security income for higher-income beneficiaries. This approach achieves a similar outcome to direct means testing but without the associated administrative costs (Goodman and Liebman 2008). While means tests can target benefits to those most in need, they can be administratively expensive. For example, in 2014, administrative costs for the Supplemental Nutrition Assistance Program (SNAP) amounted to 4.9 percent of total expenditures. Given Social Security’s vast expenditures of $851 billion in fiscal year 2014, even a small percentage point increase in administrative costs for means testing would represent billions of dollars annually.
The income thresholds below which Social Security benefits remain tax-exempt ensure that lower-income beneficiaries are protected. However, because these thresholds are not indexed, the proportion of beneficiaries paying taxes on their benefits continues to rise. Over time, the taxation of Social Security benefits is increasingly resembling the tax treatment of pensions and annuities, which, according to the legislative history of the 1983 amendments, was the original intent of Congress when setting the initial nominal-dollar thresholds. As income tax tiers and policies continue to evolve, understanding their interplay with Social Security benefit taxation is essential for ensuring a sustainable and equitable retirement income system.
Notes
[1] From 1950 through 2012, the ratio of income taxes to personal income averaged 9.5 percent per year. The annual ratio was never lower than 7.2 percent or greater than 11.6 percent (IRS 2014).
[2] For most taxpayers, modified AGI equals AGI plus tax-exempt interest income, income from foreign sources, and one-half of Social Security benefits.
[3] Special rules apply to heads of households (single parents) and married couples filing separately. Complete rules for counting Social Security and Tier 1 Railroad Retirement benefits as taxable income are included in IRS (2015a).
[4] Pattison and Harrington (1993) describe 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 taxation of Social Security benefits.
[6] According to IRS instructions, “if you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. The rest of the amount you receive is generally taxable” (IRS 2015b, 77).
[7] As of 2015, a worker pays a Social Security payroll tax of 6.2 percent on earnings up to $118,500. The worker’s employer pays an equal amount, which is a tax-deductible business expense. Self-employed workers are liable for the full 12.4 percent payroll tax, but they are eligible for two 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 tax from personal income reported on IRS Form 1040. The payroll tax deduction is a factor in determining AGI (SSA 2015a).
[8] The selection of nominal-dollar thresholds was deliberate, so that eventually the tax treatment of Social Security income would be similar to that of pensions and annuities (Senate Finance Committee 1993).
[9] Taxable income consists mainly of wages and salaries, interest, dividends, rent, royalties, capital gains, income from the sale of goods or property, income from a farm or business, 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 percent. Characteristics of birth cohorts after 1979 are simulated rather than being based on SIPP records.
[11] MINT simulations for 2020 and later reflect samples that are successively more representative of the full population of aged beneficiaries, as members of birth cohorts from 1925 or earlier are replaced by members of later cohorts over time.
[12] Results would be similar if the assumed date of the switch to wage indexing were a few years earlier or later. 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 be 21 percent filing singly, 50 percent married couples filing jointly, 1 percent filing as the head of a household, and 28 percent not filing a tax return.
[14] Means tests limit eligibility for government-provided benefits or reduce the amount of the benefit for individuals who have income or assets above thresholds set in law. Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI), and Medical Assistance (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
1979 Advisory Council on Social Security. 1979. Social Security Financing and Benefits: Report of the 1979 Advisory Council. Washington, DC: Department of Health, Education, and Welfare, SSA.
[Board of Trustees] Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 2014. The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC: Government Printing Office. https://www.socialsecurity.gov/oact/tr/2014/tr2014.pdf.
———. 2015. The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC: Government Printing Office. https://www.socialsecurity.gov/oact/tr/2015/tr2015.pdf.
Goodman, Sarena, and Jeffrey Liebman. 2008. “The Taxation of Social Security Benefits as an Approach to Means Testing.” NBER Retirement Research Center Paper No. NB 08-02. Cambridge, MA: National Bureau of Economic Research. http://www.nber.org/aging/rrc/papers/orrc08-02.pdf.
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