The 1983 law that started taxing Social Security benefits on the wealthiest seniors has never been updated. That means that it now taxes far more people than originally intended and if not changed, will tax more and more people in the future.
What to do about the anticipated revenue shortage for Social Security that will reach its breaking point in 2035 is a big issue in Washington D.C. and in the current Presidential election. This is not the first time politicians have been concerned about the long term prospects of Social Security. In the early 1980s the system was also in need of saving.
One idea floated back then, and sometimes mentioned now, some form of “means testing” for benefits. In other words, that means giving reduced or no benefits to taxpayers defined as wealthy. However, that has never been a politically popular option with seniors.
For example, instead of doing that in 1983, lawmakers decided that some Social Security benefits would be taxed for wealthy people. At the time it was anticipated that only about 10% of beneficiaries would be taxed on any portion of their benefits. Nevertheless, the law included no mechanism to adjust for inflation.
Consequently, the same raw numbers from 1983 are still used today to determine whose benefits get taxed and how much of those benefits gets taxed. As My San Antonio points out in “Care to Guess How Many Seniors Could Be Taxed on Their Social Security Benefits by 2030?” that means many more Americans are taxed today than was originally intended.
As of 2010, 47.1% of beneficiaries were taxed on some portion of their Social Security benefits. That number is expected to rise to 58% in 2030 if no changes to the law are made.
If you are nearing retirement, then be aware of these taxes and plan accordingly for the impact on your retirement.
Reference: My San Antonio (April 10, 2016) “Care to Guess How Many Seniors Could Be Taxed on Their Social Security Benefits by 2030?“
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