A bill has been introduced in Congress to remove federal income taxes on Social Security payments, though ThinkAdvisor reports there are some concerns about its potential impact on the system.
H.R. 9359, The Social Security Tax Freedom Act, was introduced by Rep. Jefferson Van Drew, R-N.J. It would end the requirement for Social Security benefits to be included in taxable income.
“People who rely on Social Security have already more than contributed their fair share through years of payroll taxes and hard work,” Van Drew said. “They have busted their backs for decades, and now, when it is time for them to enjoy the benefits, they see portions of their hard-earned benefits reduced by even more taxes. It is just outrageous.”
But Social Security advocates and experts raised objections to the bill’s provision that the shortfall in tax revenues would be funded through congressional appropriations. Dan Adcock, director of government relations and policy for the National Association to Preserve Social Security and Medicare, told ThinkAdvisor that using general government funding for this purpose would “violate the earned right nature” of Social Security.
“We favor Rep. John Larson’s Social Security 2100 Act and similar bills in the House and Senate that expand and strengthen the program by demanding that the wealthy begin contributing their fair share.”
Nancy Condon, president of Social Security Works, noted that the taxation of benefits is meant “to treat them the same way that private employer-sponsored retirement plan benefits are taxed, with the one difference that the proceeds are dedicated to Social Security. Notwithstanding the rationale, the taxation is extremely unpopular.”
Condon added that the Social Security 2100 Act “addresses the unpopular provision, and has done so since it was first introduced, about a decade ago,” Condon continued. “The big difference is that, unlike the Social Security Tax Freedom Act, the Democratic proposal replaces the lost revenue by requiring that those with incomes over $400,000 pay their fair share.”
About 67 million U.S. households currently receive monthly benefit checks from Social Security. Up to 85% of Social Security benefits can be subject to federal tax, depending on a taxpayer’s combined income. The revenue from those taxes comprises about 4% of the revenue for Social Security.
During the presidential campaign, Donald Trump promised to repeal taxes on Social Security benefits, and Van Drew said his bill would call for the Treasury to cover any shortfall caused by the tax repeal.
But Condon called the proposal “a cruel mirage”, given the fact that Social Security currently faces a revenue shortfall in about a decade unless the situation is addressed by Congress.
“Benefits will no longer be taxed but the benefits themselves will be cut by more than the tax savings — and that cut will occur sooner than if Congress took no action whatsoever,” she said. “If Congress decides to address the taxation of benefits, the only responsible action is to replace the foregone revenue, as the Larson bill does.”
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