Delayed claiming favors the wealthy, while taxes on benefits
hurt middle-income recipients
A lot has changed
since Congress approved major reforms to Social Security rules more than 35
years ago. Life expectancy has increased. Interest rates have declined. And
inflation has transformed the taxation of Social Security benefits from a class
tax to a mass tax, according to two new reports.
The result is
Social Security now pays relatively higher lifetime benefits to wealthier
retirees who can afford to delay claiming their benefits, and middle-income
retirees are now shouldering more of a tax burden because the income thresholds
for taxing benefits were never indexed for inflation.
Roughly half of all
retiree households report that a portion of their Social Security benefits is
subject to taxation, according to recent survey results from The Senior
Citizens League.
To determine if a
portion of the taxpayer's Social Security benefits is taxable, half of Social
Security benefits are added to adjusted gross income, plus any tax-exempt
interest, to calculate "combined income." Individuals who have
combined incomes of $25,000 or more and married couples with combined income of
$32,000 or more are subject to income taxes on up to 85% of their Social
Security benefits.
"This is a tax
that was estimated to affect just 10% of Social Security beneficiaries when it
was first enacted in 1983," said Mary Johnson, a Social Security and
Medicare policy analyst for TSCL. "Today, the Social Security benefits of
even modest-income retirees are affected by the tax."
Had the income
thresholds been adjusted for inflation since the 1983 enactment, the $25,000
threshold would be about $63,137 today, and the $32,000 threshold would be
about $80,815, based on the Bureau of Labor Statistics' inflation calculator,
Ms. Johnson said.
Legislation currently
under consideration in Congress would adjust the income thresholds for taxing
Social Security benefits. The Social Security 2100 Act
would raise the current $25,000 threshold for individuals to $50,000 and boost
the current $32,000 threshold for married couples to $100,000.
The bill, supported
by 55% of participants in the TCSL survey, would offset the lost tax revenue by
increasing the amount of wages subject to payroll taxes and gradually
increasing the tax rate paid by workers and employers. The revenues from the
tax on Social Security benefits are credited to the Social Security and
Medicare trust funds and provide a growing share of the program's financing.
Separately, new research from the Center for
Retirement Research at Boston College examines a key feature of
the Social Security benefit formula designed to keep lifetime benefits constant
for someone with average life expectancy, whether they claim reduced benefits at 62 or
enhanced benefits at 70.
The report notes
that the actuarial adjustments are decades old and do not reflect improvements
in longevity, particularly for higher earners, and declining interest rates.
Individuals with a
full retirement age of 66 can claim benefits as early as 62 but their benefits
are permanently reduced by 25% for claiming early.
Someone who was
born in 1960 or later with a full retirement age of 67 would have their
benefits reduced by 30% if they claimed at 62. Benefits are reduced by 6.7%
annually for three years before full retirement age and by 5% per year if
claimed more than three years early.
In contrast, someone who delays claiming
Social Security beyond full retirement age earns delayed
retirement credits worth 8% per year up to age 70.
"The key
takeaway from this analysis is that for the individual with average life expectancy,
the reduction for claiming early is too large and the delayed retirement credit
is about right," the CRR report found. The question is whether these
conclusions apply across the earnings spectrum.
Life expectancy has
always varied by earnings. Those with more money tend to live longer. In
addition, higher earners are also more likely to claim Social Security later
than average.
"If the
delayed retirement credit were based on the life expectancy of those who use
it, it should be smaller than the current 8% to equalize the cost of early
versus late claiming," the report concluded. "Thus, the current
adjustments, both between 62 and 65 and between 65 and 70, favor
delayed claiming and as a result, they increasingly favor higher earners."
Although the idea
of reducing the current delayed retirement credit of 8% per year is not on the
table, it seems a likely target once Congress eventually tackles Social
Security reform, sometime before the trust funds
are expected to run dry in 2034.
No comments:
Post a Comment