One of the biggest problems with voting for the elderly in last year’s US presidential election was social security. There is a good reason for this. The government program is essential for the budgets of millions of Americans. Approximately half of people aged 65 or more years receive 50% or more of their social security income, according to data reviewed by SSA.
President Trump appealed to these voters in his campaign, saying that he would work to make sure they would get the most from the program. This includes a proposal to eliminate taxes on social security benefits. Not only taxes on social security income, but they are also an additional financial burden for many households who collect benefits.
However, the removal of social security tax comes with some bad news for retirees. As with everything in the economy, there are some significant compromises.
Image source: White House.
It is important to understand the current state of social security before you immerse yourself in how President Trump’s proposal will affect the elderly. It seems that pensioners are facing a great reduction in benefits in the near future, which will be much worse than all taxes that most of them are currently paying for benefits.
The Government established a Social Security Trustee Fund in 1939. All the taxes it collects for the salaries enter the Trust Fund and all the benefits it pays leave the Trust Fund. In the meantime, he invests excess money held by the fund in stable government bonds to help the Trust Fund grow and support future payments of benefits.
This system works well as the population is increasing and the standard of living has improved. More workers who earn higher average salaries have led to a massive surplus.
However, the balance of the Trust Fund began to shrink near the end of the last decade, when Baby Boomers retired and the workforce increased more slowly. The assets of the Trust Fund have contracted with $ 260 billion since the end of 2018, falling to $ 2.54 trillion by the end of last year. And the speed of decline is accelerated. Net assets fell over $ 100 billion last year.
Ycharts data.
Social security trustees estimate that if there are no changes to the program, it will exhaust the entire trust fund sometime in 2033. At that moment, the tax revenue it pays will cover only 79% of the retirement benefits.
In other words, the elderly face a permanent 21% hairstyle about their social security benefits in just a few years without significant social security reforms.
Social security taxes are extremely complicated, but the long thing is that most households will pay less taxes every year than what leads to 21%, reducing for benefits.
The government determines how much, if any, of your social security benefits are considered to be a taxable income based on an indicator called “combined income”. Combined income adds half of your social security benefits to your adjusted gross income and any income from non -tax interest rates.
If your combined income exceeds certain thresholds, you will pay taxes on the income of up to 85% of your benefits as described in detail.
Taxable benefits
Combined income (single)
Combined income (joint)
0%
Less than $ 25,000
Less than $ 32,000
Up to 50%
Between $ 25,000 and $ 34,000
Between $ 32,000 and $ 44,000
Up to 85%
More than $ 34,000
More than $ 44,000
Data Source: IRS.
You may think that these thresholds are extremely low and are. This is because these numbers have not been updated for inflation as they have been introduced more than 30 years ago. However, since social security benefits receive an annual car involved in inflation, more and more elderly people are facing tax accounts for their social security benefits. This makes Trump’s proposal to remove these taxes more and more attractive.
However, it is worth noting that compared to the existential challenge facing social security and a potential 21% reduction in benefits throughout the board, current taxes are not so bad. The best quintil for households pay an average of 20% taxes on their benefits, according to the Center for the Budget and Political Priorities. This corresponds to the income of over $ 205,800. Households with lower incomes, which rely to a large extent on social security, are not facing a significant, if any, the financial burden of taxes on benefits. The lower 40% of the higher income households pay an average of less than 1% of social security taxes.
Remember that the Social Security Fund has only two sources of revenue: the interest it collects on the bonds in which it invests and the tax revenue. Although the bigger part of these tax revenue comes from the earned income, a significant part comes from the income taxes it collects on social security benefits.
This means that Trump’s proposal to eliminate social security income taxes will reduce the amount that the fund is wearing. And with less entry into the fund and the same amount will come out, its exhaustion will be accelerated. A study by the University of Pennsylvania Wharton School of Business Evaluation, termination of taxation on benefits, will reduce revenue by $ 1.45 trillion over the next 10 years.
As a result, pensioners may expect the Social Security Trust Fund to expire money even earlier if Trump successfully eliminates taxes on benefits. On top of that, such a move will require more deep benefits after the assets of the Trust Fund are exhausted, as it will have less revenue. So, the elderly face the potential of a much larger weight for their household budgets in just a few years than the taxes currently present. This will hit low-income households that rely on social security benefits much more difficult.
It is important to note that maintaining social security taxes will not determine the challenges of the program. The government must make widespread reforms to guarantee the health and longevity of social security. But the removal of taxes on benefits will move it in the wrong direction and largely serves as the benefit of high -income households in the short term.
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The biggest Social Security Social Security offer may be bad news for retirees, originally published by Motley Fool
