Why isn't taxability of benefits indexed?

[Texconsin]

It sure would be nice if taxability of benefits didn't come into play at such a low threshold!  I'd like to be able to calculate Roth conversions now and RMDs in a few years (added to my taxable interest) to match my itemized or standard deduction for a net income tax of close to ZERO (+/- a few bucks), but the taxability of my indexed benefits makes it nearly a circular calculation and I feel like a dog chasing my own tail to get to a ballpark result.  Doesn't Congress understand that benefits already not indexed to adequately meet the real costs in retirement is already a kick in the shorts without adding insult to injury letting the IRS gobble-up an ever-increasing percentage of them?  What's even stranger is that I never see AARP lobby for that change in the law...or maybe AARP isn't smart enough to see past advocating for their favorite political party!!!

[Tonster521]

@Texconsin   With regard to indexing the thresholds, I  found what I believe was the first Bill that addressed indexing the SS thresholds. I included the link in my reply to Gail1. That Bill was introduced August 6, 1993 or 28 years ago. I suspect there were additional Bills with variations since then. Further, you can spend hours if not days, if you have the time and patience, reviewing the proposed Bills and info at congress.gov. I found an article that provides some insight into how Bills are initiated and the process which a Bill becomes law. https://newhealthcarebillfacts.com/how-many-bills-are-introduced-in-congress-each-year/ Although the article is titled new healthcare bills, it indicates that the 115th Congress introduced over 10,000 Bills between 2017 and 2019 and only 443 were signed into law. I guess some folks would state our Congressmen and women are very busy. Other folks will state they waste a lot of time and money producing Bills that go nowhere. We can only guess what issues the AARP will support. I suspect the issues will be broad based that affect many folks not just the higher incomes. 

Just for fun, I entered the $34 K and $44 K thresholds into a Future Value calculator and used 2% as the interest factor for 28 years with compounding just once per year and the results are $59 K and $77 K ,respectively for 2021. I rounded the fractional dollars up or down to the next thousand. I am guessing this indexing, if implemented, would have cost the SS Programs Billions over 28 years.

[GailL1]

@Texconsin 

Since AARP advocates supporting proposals to strengthen Social Security and a lot of the income to the Trust Funds are currently coming from these beneficiary taxes on their SS benefits - I doubt this is the proper time to be talking about reducing revenues into the Trust Funds by lifting or indexing the income limits.

Social Security Trust Fund Data 1957 to present

However, at the state level, I believe they have been successful over the years in convincing many states to stop taxing these benefits. 

There are some House proposals to "fix" Social Security that contain provisions to raise the income limits to which these benefit taxes would apply.  But don't hold your breath cause again this would reduce revenues to the program and would have to be made up somewhere else.

Under current law, single tax filers with combined “income” (approximately equal to adjusted
gross income plus non-taxable interest income and one-half of their Social Security benefit)
greater than $25,000 may have to pay income tax on up to 50 percent of their Social Security
benefits. If combined “income” exceeds $34,000, up to 85 percent of benefits may be taxable.
Currently this income tax revenue on SS benefits is disbursed as follows:

• For taxing up to 50 percent of Social Security benefits is credited to the
  OASI and DI Trust Funds.
• The additional income tax revenue derived from taxing benefits in
  excess of 50 percent, up to 85 percent, is credited to the HI Trust Fund.

The process is similar for joint tax filers, with $32,000 and $44,000 thresholds applying for possible taxation of up to 50 percent or 85 percent of the Social Security benefits, respectively. 

The following changes have been suggested in the following bill (pdf version of the SS Actuary report on the bill)

Social Security 2100: A Sacred Trust” Act, introduced on October 26, 2021 by Chairman John Larson 

Section 104. Replace the current-law thresholds for federal income taxation of OASDI
benefits with a single set of thresholds at $35,000 for single filers and $50,000 for joint filers
for taxation of up to 85 percent of OASDI benefits, effective for tax years 2022 through 2026.
Revert to current-law specifications for tax years 2027 and later.

Under the proposal, both sets of the current-law thresholds would be replaced with a single set of
thresholds, $35,000 and $50,000 for single and joint filers, respectively, for taxing up to 85 percent of OASDI benefits, effective for tax years 2022 through 2026. For tax years 2022
through 2026, the amount of revenue from taxation of OASDI benefits that would be allocated to
the HI Trust Fund would be at the same level as if the current-law computation (in the absence of
this provision) were applied. The net amount of revenue from taxing OASDI benefits, after the
allocation to HI, would be allocated to the combined OASI and DI Trust Funds. All
specifications for taxing Social Security benefits would revert to current law for tax years 2027 and later.

Again, I would not hold my breath - these income limits for taxes on benefits have been in place for a VERY LONG TIME.  We have all kinds of ways that we can plan for retirement and thus we can also plan for these taxes and help out the program.

[Tonster521]

@GailL1 I thought I would develop the tax savings folks would obtain from Chairman Larson's proposal. As I understand the net effect, the tax savings benefit the higher income folks. Based on my calculation you and other readers may get a chuckle/laugh at the results from increasing the 85% thresholds from $34 K /$44 K single/married to $35 K /$50 K. The vast majority of folks, if they pay federal income tax (FIT), are in the 10%, 12% or 22% tax brackets. I will illustrate the 12% bracket for folks exceeding the thresholds.. For a single, the increased threshold is $1,000. So, at the 12% tax bracket, there is a savings of $120. For married, the increased threshold is $6,000. At the 12% tax bracket, there is a savings of  $720. I am sure that everyone can use an extra $120 to $720. For the folks in the 10% bracket, the tax savings is less. And, for the folks in the 22% bracket, the tax savings is greater. Perhaps a tax consultant or CPA reading this posting can verify my math. Moreover, you mentioned (and I agree) any tax savings will need to be made up somewhere else. 

Another point which you may already know, a Bill was introduced in the House (H.R. 2986).on August 6, 1993 regarding indexing the thresholds. https://www.congress.gov/bill/103rd-congress/house-bill/2986?q=%7B%22search%22%3A%5B%22Taxation++soc... Sorry for the length, I don't know how to shorten the link via the Copy and Paste function. So, as far as I can determine, the indexing issue has been around for at least 28 years and nothing has been done. I agree that folks should not hold their breath regarding this issue. 

[Tonster521]

@Texconsin To understand why SS benefits are taxable at 50% and 85%, you need to review the history at ssa.gov. It is lengthy and may provide the reason(s) why the thresholds have not been indexed. As I recall, SS amendments in 1983 and 1993 put in place the 50% and 85% thresholds, respectively, for the higher income folks. Initially, only a small percentage reported SS benefits as taxable income.Today, about 56% of the folks pay some amount of tax on their SS benefits. I am providing a link to the 2020 Census https://www.census.gov/content/dam/Census/library/visualizations/2021/demo/p60-273/figure1.pdf wherein income is "sliced and diced" for selected characteristics. For the 65 years and older characteristic, the median income is $46,360. As I understand "median", this is the middle. Half are above and half are below. Based on that statistic, I suspect it is not a "hot button" issue for Congress. In another posting, someone commented that as long as the SS Trust Fund is projected to deplete around 2034-2035, SS benefits will remain taxable. I agree.