It’s time to get rid of Social Security’s not-so-hidden tax

The Social Security tax is a scandal sitting in plain sight. It is a stealth tax levied on middle-income seniors that was not supposed to hit them. And it is an egregious example of double taxation, because the people paying tax on the benefits also paid tax on the money they put into the system.

Actually, it’s worse than that.

While your money is sitting in the trust fund it isn’t invested like normal pension money. Instead it is lent to Uncle Sam at low rates of interest so he can use it for government spending.

If the president wants to boost his sagging popularity while helping the middle class and doing the right thing, he should cut the tax, or raise the thresholds at which it applies.

The critical thing to understand about the taxation of Social Security benefits is that it was introduced only in 1984, courtesy of a commission chaired by Alan Greenspan, and the tax thresholds were never indexed for inflation.

Repeat: Never indexed for inflation.

This year, your benefits will be taxed if your income tops $25,000 a year (or $32,000 for joint filers).

The figure in 1984, when the tax first kicked in: $25,000 a year, and $32,000 for joint filers.

During the intervening 38 years, wages and consumer prices have tripled. And the thresholds haven’t moved at all.

As a result, a tax that hit only the top 10% of Social Security recipients back then now hits about half.

It is no coincidence that, in 1984 the median family income was $26,000, or around the threshold. Today it’s about $80,000.

“Unlike other federal income taxes, Congress has never adjusted the income thresholds that subject Social Security benefits to taxation since the tax became effective in 1984,” says Senior Citizen’s League analyst Mary Johnson.

Even worse, when the tax was introduced it only applied to 50% of your benefits. But today, thanks to further tax hikes introduced in 1993, it goes up to 85% of your benefits, and it does so pretty fast. Once your income tops $34,000 a year, or $44,000 for joint filers, you’re in the 85% zone.

This is no small potatoes. Last year this double tax (or triple tax) walloped senior citizens for $41 billion, according to the trustees’ latest report. It’s expected to cost them $44 billion this year. Worse yet, the Social Security administration is expecting the tax take to double over the next seven years and to hit $100 billion a year within a decade.

One of the dirty secrets of Social Security is that the government is counting on inflation to bail out the system, and a major reason for that is that it pushes people into higher tax brackets, both for payroll taxes when you’re working and this tax on benefits when you retire.

The argument for taxing 50% of benefits has at least a modicum of logic to it. Your employer technically pays half your Social Security contributions, and they can deduct that cost against their corporate income tax. But that’s 50%, not 85%, so the higher rate is simply a racket.

Furthermore, when you think about it, even taxing 50% of benefits is an outrage. It means that you are effectively paying some of your employer’s corporate income tax.

With stuff like this in the tax code, no wonder it’s been so much better to be a stockholder than a working stiff for decades. (And Social Security beneficiaries get no benefit from that, because this is about the only pension fund on the planet that doesn’t invest your money productively in the stock market.)

Social Security beneficiaries get no benefit from that, of course, because of the triple tax mentioned earlier. It is about the only pension fund on the planet that doesn’t invest your money productively in the stock market, but lends it cheaply — to the guy running the fund.