The Controversial Way Social Security Can Generate $775 Billion in Revenue Over the Next Decade


For many Americans, Social Security is already, or will become, a significant part of their monthly income in retirement. According to annual polls conducted by Gallup for the past two decades, Social Security payments have been a “main” source of income for at least 54% of respondents in all but one year.

For decades, this premier retirement program has done a fantastic job lifting older Americans out of poverty and providing some type of financial floor for retirees. Unfortunately, it’s also a show that continues to inch closer to disaster.

Image source: Getty Images.

Social Security faces a $20 trillion chasm

People are also reading…

Every year since payments to retired workers began in 1940, the Social Security Board of Trustees has issued a report outlining the short-term (10 years) and long-term (75 years) outlook for the program. This report, usually more than 200 pages long, takes into account a myriad of economic and demographic changes to determine how “healthy” Social Security is from a financial perspective.

Since 1985, this annual report has served as a warning that Social Security is estimated to have insufficient revenue to cover its expenses (ie, benefit payments) in the long term. The 2022 report estimates a cash shortfall of $20.4 trillion through 2096, with more than half a dozen factors contributing to this shortfall.

More importantly, the trustees’ latest report makes the case for the Old Age and Survivors Trust Fund (OASI) to deplete its asset reserves, its excess cash accumulated since inception, by 2034. The OASI is what looks at payments to more than 48 million retired workers each month. If these asset reserves are depleted, an across-the-board benefit cut of 23% may be required to keep payments going through 2096.

Also Read :  Daily Financial Regulation Update -- Thursday, September 29, 2022 | Paul Hastings LLP

There are pretty much only two levers to pull when it comes to “fixing” Social Security’s looming cash shortfall: increase extra income or cut costs. Since most people aren’t excited about the prospect of lower monthly payments or lifetime benefits, increasing income is where the pendulum usually swings.

This hated source of income is only going to become more important over the next decade.

Last year, Social Security generated just over $1.08 trillion in revenue from three sources. The 12.4% payroll tax on earned income accounts for the bulk of income. Last year it generated 90.1% of the $1.08 billion raised.

The second source of income is net interest income, which represented $70.1 billion in income. The program’s asset reserves are required by law to be invested in special issue government bonds and debt certificates. The interest earned on these bonds and certificates of debt helps fund Social Security benefits.

US Old-Age, Survivors and Disability Insurance Trust Fund income from taxation of YCharts benefit receipt data. The $40.7 billion noted on the chart is for 2020, according to the trustees’ report.

Finally, there is the most controversial source of income: the taxation of profits.

In 1983, with the program’s asset reserves nearly depleted, then-President Ronald Reagan signed into law the last bipartisan reform of Social Security. In addition to gradually raising the payroll tax and the full retirement age, he introduced the taxation of Social Security benefits, which went into effect in 1984.

When first introduced, up to 50% of benefits could be exposed to federal tax if an individual’s modified adjusted gross income (MAGI) plus half of benefits was more than $25,000 (or $32,000 for a couple filing a claim). joint declaration). In 1993, the Clinton administration added a second tier that allowed up to 85% of benefits to be federally taxed if the MAGI formula plus half the benefits crossed more than $34,000 for a single taxpayer or $44,000 for a couple filing jointly.

Also Read :  Here are 6 strategies to recession-proof your finances at any age

Last year, the taxation of profits generated $37.6 billion, or 3.5% of total revenue. By 2031, the intermediate cost model (i.e., the cost model that the trustees believe is most likely to occur) projects that the benefit tax will account for $112.7 billion in revenue, or 6.3% of projected annual revenue for Social Security.

Over the next decade, the taxation of profits is forecast to generate $775 billion in revenue.

Image source: Getty Images.

The taxation of benefits is the necessary evil of Social Security

To say that older people despise benefit taxation might be an understatement. Five years ago, The Seniors Center surveyed retirees about ways to “ease the burden of rising cost of living for seniors.” An astonishing 91% of those surveyed suggested that stopping taxing Social Security benefits would be a smart move.

The biggest problem with taxing Social Security payments is that the aforementioned income thresholds that subject beneficiaries to taxes have never been adjusted for inflation. Each cost-of-living adjustment passed on to program beneficiaries results in more and more beneficiaries being affected by federal taxes on what they receive. According to The Senior Citizens League, about half of all households receiving a Social Security payment may pay some amount of tax on their benefits this year.

However, this unsavory revenue stream is unlikely to go away anytime soon, if ever, for two key reasons.

Also Read :  Elements launches new one-page plan app under NYT 'Sketch Guy' Carl Richards

First, Social Security needs all the revenue it can get to prevent its already massive $20.4 trillion long-term cash shortfall from widening further. This means not only continuing to collect taxes on benefits paid above certain income thresholds, but also ignoring the lack of inflationary adjustments in income thresholds after several decades.

The second problem is that eliminating the taxation of benefits would require bipartisan support in the Senate, which has been virtually impossible to get for Social Security in decades. Although there are a couple of shortcomings in the program that Democrats and Republicans agree exist, the two parties have approached solutions from opposite ends of the spectrum and have been unwilling to meet their opposition in the middle.

Given the financial state of Social Security, the taxation of benefits is a necessary evil that will only grow in importance over the next 10 years.

The $18,984 Social Security Bonus Most Retirees Completely Overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: An easy hack could pay you up to $18,984 more… every year! Once you know how to maximize your Social Security benefits, we believe you’ll be able to retire with the confidence and peace of mind we all seek. Simply click here to find out how to learn more about these strategies.

The Motley Fool has a disclosure policy.


Leave a Reply

Your email address will not be published.