Note to readers: Part one of this two-part essay was about FICA, and how a hidden tax affecting only people who work for wages is used to levy a heavy tax on those workers. Part of the strategy behind that tax is to hide half of it behind the employer, calling it a matching tax.
This part of the essay deals with another tax, this one not so hidden, but its creeping nature slowly taking more and more benefits from Social Security recipients each year. The means by which they accomplished this were diabolically clever.
This essay will be a bit more complicated than the one before, so if you find the calculations incomprehensible, merely skim them, as I will describe the outcome in understandable terms.
As Johnny Carson used to say of comedy, “If you buy the premise, you buy the bit.” The premises behind taxation of Social Security benefits are two: (1) The program is in dire straits, and will soon run out of money, and (2) Recipients receive a gift in the form of the employer match, so that it is just to levy income tax on half of the benefits paid.
As can be judged from the first essay, the program is solid and safe for so long as the government chooses to keep it so, and the employer “match” is a feint, a hidden tax on the employee routed through the employer to make it appear that the employee is not the one paying it.
With those two premises in place, Congress in 1983 for the first time in the history of the program enacted a tax on benefits. I won’t dwell on the 1983 law in great detail, even as it still stands, since it has been overshadowed by a new law in 1993. I will only describe it briefly: One-half of benefits became taxable (get it? That is the employer match) when certain thresholds were met by the taxpayer. When for a married couple one-half of benefits plus all other income exceeded $32,000, that excess became taxable. For single people the threshold was $25,000.
The law was written using the frog in warm water model. In 1983, hardly anyone made enough money to be affected, so the new tax slipped by unnoticed. Here is the key, the sleight-of hand: Congress did not index the thresholds for inflation.
I was naive about that, and even wrote to my senators complaining, thinking this was an oversight. The responses I got (if I got a response) were evasive, and it was clear to me that nothing would be done to fix the error. That is because it was not an error.
Slowly inflation eroded the value of our currency, and more and more people became subject to the tax. But I suspect Congress grew impatient, as it was not impacting enough people in a hard enough manner. So in 1993 they stiffened the law. At that time, while leaving the 1983 law in place, they enacted a new law saying that 85% of benefits would be taxable if certain new thresholds were met, this time $34,000 for single people, and $44,000 for married couples. Again, those thresholds were not indexed for inflation.
This law had teeth. It began to impact married couples immediately, and by 2010 single people were being hit hard as well.
Bracket Creep was widely discussed in the 1970s forward, as with a graduated income tax, just keeping up with inflation meant that people had to earn more money, but that money became taxable at higher rates due solely to inflation. Here, for instance, are the income tax bracket rates for the year 1993 for married people.
It is easy to see that as inflation pushes incomes up (without adding purchasing power) that the government gets a percentage tax increase unless brackets are indexed for inflation. And they are indexed, and have been for decades. There is no point of comparison because Congress has so often monkeyed with the brackets, but the point stands, that Congress is aware of the impact of inflation and adjusts income taxes accordingly.
(FICA is also indexed for inflation, but oddly, that tax is bracketed to go up as inflation devalues the currency. This is done by adjusting the ceiling below which the tax is levied upward. In 1993 the first $57,600 was subject to FICA, and in 2018 it is $128,400 – see how it works? FICA goes up each year.)
By failing to adjust the thresholds for the 1993 tax on Social Security benefits, Congress levied a tax on future generations, and escaped accountability at the time. Using the CPI as a guide, here is what the thresholds should be had they been indexed for inflation:
Now, for the impact of the failure to adjust the threshold – I am going to go through some calculations here, but if you find taxes obtuse, skip to below where I summarize.
Summary: If the thresholds had been adjusted for inflation (to $57,640 single and $74,593 MFJ), as they are for all other taxes, in 2017 the tax on 85% of Social Security benefits would have been zero. Instead, a single person paid $550 and a married couple $2,572.
Now we need to work backwards. Here’s a comparison of benefits in 1993 and 2017, showing how the tax has affected those benefits.
As you can see, by the mere failure to adjust the threshold of this tax for inflation, Congress managed to reduce benefits for married couple in 2017 by a whopping 13%!
This is no accident, of course. It was the intent of the sleight of hand. Congress could not arbitrarily reduce benefits by 13% without creating an uproar. So they went through the back door. The premise, that Social Security is in trouble, that we cannot afford the program, has allowed Congress to radically reduce the benefits of current beneficiaries through a back door approach.
I urge you write your senators and representatives about this, demanding that they treat the income thresholds underlying the taxation of Social Security benefits as all other taxes are treated, indexed for inflation.
I am kidding! Don’t bother. I tried that. I used the word “Congress” above euphemistically, as Congress no more sets policy than the student council sets policies for your local high school. The impetus for passage of laws comes from other places, ones to which we cannot write letters.