Which Type of Tax Provides Income for Retired and Disabled People and Their Families
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds take been required to pay federal income tax on some of their do good income. Considering those income thresholds have remained unchanged while wages accept increased, the proportion of beneficiaries who must pay income revenue enhancement on their benefits has risen over fourth dimension. A Social Security Administration microsimulation model projects that an annual average of about 56 percentage of beneficiary families will owe federal income revenue enhancement on role of their do good income from 2015 through 2050. The median per centum of benefit income owed as income tax by beneficiary families volition ascension from 1 percent to 5 percent over that menstruation. If Congress does not adjust income taxation brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.
Patrick Purcell is with the Office of Retirement Policy, Function of Retirement and Disability Policy, Social Security Administration. Questions about the analysis should be directed to the author at (202) 358-6348.
The findings and conclusions presented in this paper are those of the authors and exercise not necessarily represent the views of the Social Security Administration.
Summary and Introduction
| AGI | adapted gross income |
| AWI | average wage index |
| CBO | Congressional Budget Office |
| IRS | Internal Acquirement Service |
| MINT | Modeling Income in the Near Term |
| OBRA 93 | Omnibus Budget Reconciliation Act of 1993 |
| SIPP | Survey of Income and Program Participation |
| SSA | Social Security Administration |
Since 1984, Social Security beneficiaries with full income exceeding certain thresholds accept been required to claim part of their Social Security benefits as taxable income. The income thresholds for taxation of benefits have remained unchanged since Congress first established them but, because wages accept increased, the proportion of Social Security beneficiaries who must pay federal income tax on their benefits has risen over time. In 1984, less than 10 percent of beneficiaries paid federal income taxation on their benefits. A Social Security Administration (SSA) microsimulation model, Modeling Income in the Virtually Term (MINT), projects that 52 percentage of families receiving Social Security benefits volition pay income taxation on their benefits in 2015. Most of these families will be in the upper half of the full-income distribution.
This outcome paper presents MINT projections of the percentage of Social Security beneficiary families that will owe federal income tax on their benefits as well as the proportion of do good income they will owe as income tax in selected years from 2015 to 2050, with comparative data for 2010. Although thirteen states likewise taxation Social Security income, the scope of this paper is restricted to federal income taxes.
In summary, MINT projects that an annual average of about 56 percent of beneficiary families will owe income tax on their benefits over the period 2015–2050. For 2015, MINT projects that beneficiary families will owe a median of less than ane percent of benefits in income revenue enhancement, just that one-fourth of those families will owe eleven percent or more of their benefits in income taxation. The model projects that the median percentage of benefits owed as income tax by beneficiary families volition rise to about 5 percent over the projection period. Among the 52 percent of families that are projected to owe federal income taxation on their Social Security benefits in 2015, the median share of benefits owed as tax volition be eleven percent. For those families, that proportion will remain shut to 12 per centum over the period 2020–2050.
Projecting taxation over a period of decades requires certain assumptions about future tax policy. For example, nether current law, income revenue enhancement brackets are indexed to the rate of growth of consumer prices. In the long run, incomes tend to rise faster than prices as labor productivity increases. If revenue enhancement brackets continue to be indexed to prices, the share of benefit income paid as taxes eventually will ascension above its historical average. Long-term tax estimates must assume either that income tax brackets will continue to exist price-indexed or that Congress will human activity to adjust the brackets upward.1 The estimates in this paper incorporate the cardinal assumption that Congress will act before 2025 to adjust the tax-bracket thresholds upwards. MINT assumes that the provisions of the tax lawmaking that currently stipulate the use of price indexing will change to crave wage indexing after 2023. If taxation brackets continue to be indexed to prices indefinitely, the proportion of Social Security benefit income that beneficiaries owe as income revenue enhancement volition exist higher than the estimates shown in this paper for years after 2023.
Some other important caveat about the estimates in this paper is that they apply only to Social Security beneficiaries who are modeled in MINT. Adjusted by sample weights, the beneficiary population modeled by the electric current version of MINT represents 54.3 meg persons in 2015, or 92 per centum of the average monthly beneficiary population of 59.0 million for January–June 2015 (SSA 2015b). Every bit a event, MINT simulations differ from administrative estimates produced by other federal agencies. As explained in Box ane, the difference is attributable mainly to certain income characteristics that typify the beneficiaries non simulated in MINT more strongly than they represent beneficiaries overall. Additionally, MINT simulations reflect scheduled benefits nether current police. Nevertheless, because Social Security's Lath of Trustees (2015) estimates that the trust funds volition be depleted in 2034—after which, Social Security payroll tax revenue would be sufficient to pay only about 75 pct of scheduled benefits—Congress volition presumably take remedial action earlier then. Thus, the long-term continuation of scheduled benefits under current police is uncertain, equally is the timing of any substantial changes.
Box ane.
How MINT simulations differ from other federal estimates of Social Security benefit taxation
Each year, the Treasury Department'due south Role of Revenue enhancement Analysis (OTA) estimates the corporeality of revenue generated past the taxation of Social Security benefits. The Treasury uses those estimates to credit income tax revenue to the Social Security trust funds. For 2015, OTA estimates that federal income taxes on Social Security benefits will equal about v.nine percentage of aggregate do good income, in contrast with the 7.ii pct figure estimated past MINT. The difference between the two estimates stems in large part from the deviation between the actual number of Social Security beneficiaries and the number of beneficiaries simulated in MINT. For example, for January–June 2015, the monthly number of Social Security beneficiaries averaged 59.0 million. MINT simulates a 2015 casher population of 54.iii million, or 92 percentage of the bodily number of beneficiaries. MINT excludes beneficiaries born before 1926, kid beneficiaries, disabled beneficiaries younger than age 31, and beneficiaries who reside in nursing homes.
According to data from the Census Agency's March 2014 Current Population Survey, the beneficiaries excluded from MINT are generally less probable to owe income tax on their benefits than are those included in the model simulations. In 2013, for example, 52 pct of child beneficiaries and 45 percent of beneficiaries aged 80 or older lived in families with incomes lower than 200 percentage of the federal poverty threshold, compared with simply thirty percent of beneficiaries aged60–79 (who comprise nearly 2-thirds of the casher population). On average, nursing home residents are older and poorer than other aged beneficiaries are; therefore, they too are less likely to owe taxes on their Social Security benefits.
If MINT faux all beneficiaries, its estimates of taxes owed every bit a percentage of benefit income would be lower and, thereby, closer to the OTA estimates. As they are, MINT estimates closely resemble those of the Congressional Budget Part (CBO). CBO estimates that 51.5 million beneficiaries paid 6.seven per centum of their Social Security benefits as income tax in 2014 and projects that income taxes owed on Social Security benefits will ascent to more than than 9 percent past 2039 (Shakin and Seibert 2015). MINT estimates that 52.4 million beneficiaries paid 6.7 percent of their benefits as income tax in 2014 and projects that income tax owed will exceed x pct of do good income by 2040. Like all estimates, these projections are uncertain and their accuracy depends on the reliability of their underlying data, methods, and assumptions.
Background
The first Social Security benefits were paid in 1940. From that time until 1984, benefits were exempt from federal income tax, equally authorized by Treasury Department rulings issued in 1938 and 1941 (SSA northward.d.). Because other forms of retirement income (such as private- and public-sector pensions) were subject to income tax, policymakers eventually reconsidered the taxation exemption for Social Security benefits. Both the 1979 Informational Quango on Social Security (1979) and the National Commission on Social Security Reform (1983) recommended that some Social Security benefits be included in taxable income.
The Social Security Act Amendments of 1983 (Public Police force98-21) established that beneficiaries whose full almanac income exceeds certain thresholds are required to pay income tax on up to fifty percent of their Social Security benefit income. 10 years after, the Omnibus Upkeep Reconciliation Act of 1993 (OBRA 93, Public Police force103-66) established an additional higher threshold, above which up to 85 percent of Social Security benefits are taxable. The 1983 amendments require beneficiaries to pay income tax on their benefits if their modified adjusted gross income (AGI)—which includes one-half of Social Security do good income—is greater than $25,000 for single beneficiaries and $32,000 for married couples (Tabular array 1).two,3 Specifically, beneficiaries who file taxes singly must count as taxable income the lesser of 1-half of the amount by which modified AGI exceeds $25,000 or one-half of their benefit income. Married beneficiaries filing joint income taxation returns are required to count as taxable income the bottom of half of the amount by which modified AGI exceeds $32,000 or ane-half of their do good income.4 Prior to OBRA 93, all of the acquirement raised from taxing Social Security benefits was credited to the One-time-Age, Survivors, and Inability Insurance Trust Funds.
| Line | Modified AGI (nominal $) | Taxable portion of income |
|---|---|---|
| Unmarried | ||
| one | Less than 25,000 | None |
| 2 | 25,000–34,000 | Lesser of—
|
| 3 | More than 34,000 | Lesser of—
|
| Married, filing jointly | ||
| 4 | Less than 32,000 | None |
| 5 | 32,000–44,000 | Lesser of—
|
| 6 | More than than 44,000 | Lesser of—
|
| SOURCE: IRS (2015b). | ||
| NOTE: Modified AGI is AGI plus nontaxable interest income plus income from foreign sources plus half of Social Security benefits. | ||
OBRA 93 established the second income thresholds of $34,000 of modified AGI for beneficiaries filing income tax singly and $44,000 of modified AGI for married beneficiaries filing jointly. Although benefit income for tax filers with modified AGI beneath those thresholds remains taxable co-ordinate to the terms of the 1983 amendments, up to 85 percent of Social Security benefits are taxable for beneficiaries with modified AGI exceeding the new thresholds.v The boosted acquirement generated by increasing the maximum taxable proportion of benefits above the second threshold from 50 percentage to 85 percent is credited to the Medicare Hospital Insurance Trust Fund.
The income tax treatment of Social Security benefits shown in Tabular array one summarizes information bachelor in a current Internal Revenue Service (IRS) taxpayer guide. The income thresholds and taxable proportions fix forth in the 1983 amendments and modified nether OBRA 93 remain in effect today. Because the taxable-income thresholds are not indexed to changes in prices or wages in the national economic system, the taxable proportion of aggregate benefit income has risen over time.
A worker's payroll tax contributions to Social Security in a given year are included in his or her taxable income for that year. In other words, workers pay income tax on the payroll tax. The 1983 amendments adopted the principle that beneficiaries should not pay income tax on the portion of benefit income that equals their previously taxed contributions. The principle of excluding from taxation an employee'due south previously taxed contributions also applies to pensions and annuities.6
The 1983 amendments limited the taxable proportion of benefits to fifty percent because employees pay one-half of the payroll tax, and their payroll tax contributions were already included in taxable income for earlier years.7 However, although the worker pays half of the payroll tax, a typical worker's lifetime payroll revenue enhancement contributions corporeality to much less than one-half of his or her lifetime Social Security benefits. In 1993, SSA'due south Office of the Chief Actuary estimated that the payroll tax contributions of current and future workers would equal less than xv percentage of the present value of their lifetime benefits (Goss 1993). Therefore, if the ratio of lifetime contributions to benefits is less than 15 percent, then upwardly to 85 percent of benefit income can be taxed without run a risk of double taxation. On that basis, OBRA 93 increased the maximum taxable portion of Social Security benefits from l percent to 85 percent for beneficiaries whose modified AGI exceeds the 2nd (higher) threshold specified in that law. OBRA 93 did not alter the taxable portion of benefits between the first and second income thresholds, which continues to be l percent. For beneficiaries with income below the first threshold, all benefits proceed to be tax-exempt.
In its January 1983 report, the National Committee on Social Security Reform estimated that about 10 pct of Social Security beneficiaries would pay income taxation on their benefits if half of benefits were taxable for "persons with Adjusted Gross Income (before including therein any [Social Security] benefits) of $20,000 if unmarried and $25,000 if married" (emphasis added). The 1983 Amendments to the Social Security Deed fix the income thresholds for taxation of benefits at $25,000 for unmarried persons and $32,000 for married couples (with income including one-half of Social Security benefits). Thus, the income thresholds Congress established for taxation of benefits were higher than those recommended by the Commission, only the effect of the higher thresholds was partly beginning by requiring taxpayers to include half of their Social Security benefits in the income computations.
When the 1983 amendments went into effect, nigh 8 per centum of beneficiary families were required to pay income taxation on role of their Social Security benefits (House Ways and Means Committee 2004). That percentage has increased over fourth dimension considering the 1983 amendments set the thresholds for revenue enhancement of benefits in nominal dollars, rather than indexing them to price or wage changes in the national economy.viii By 1993, an estimated 20 percent of beneficiary families paid income tax on role of their benefits (Pattison and Harrington 1993). Subsequent estimates by the Congressional Upkeep Part (CBO) put the per centum of beneficiaries paying income taxation on their benefits at 25 per centum in 1997, 32 per centum in 2000, and 39 percentage in 2003. More recently, CBO estimated that 49 percent of Social Security beneficiaries paid income tax on their benefits in 2014 and that their average tax payment equaled six.seven pct of benefit income, although "less than thirty percent of all Social Security benefits paid out in 2014 were discipline to income taxation" (Shakin and Seibert 2015). The authors too projected that more than 9 per centum of benefits will be owed as income tax by 2039.
Although the percentage of families that pays income taxation on Social Security benefits has risen, not all beneficiary families are required to file an income taxation return, and non all beneficiaries who file a return owe income tax on their benefits. Individuals and married couples must file a tax return only if their taxable income exceeds the sum of the standard deduction and personal exemption amounts in effect for that year.9 For example, in 2016, a single person younger than age 65 volition have to file a federal income taxation render just if his or her 2015 income from nontax-exempt sources exceeds $10,300. For married couples in which both spouses are younger than age 65, the income threshold for filing a taxation return for 2015 will be $20,600. Single persons aged 65 or older volition take to file a revenue enhancement return in 2016 only of they accept 2015 income of more than than $11,850. Married couples in which both spouses are 65 or older will have to file a tax render only if their 2015 income exceeds $23,100.
Information and Methods
The MINT microsimulation model was used to estimate the proportion of Social Security beneficiary families that will owe federal income tax on their benefits and the percentage of do good income they will owe as income taxation over the catamenia 2010–2050. Microsimulation models apply information about a sample of "micro units" such as individuals, families, or households to estimate how changes in their characteristics or behavior will affect the entire population or a selected subgroup such every bit workers or retirees. These models are widely used by federal agencies to clarify the distributional effects of public policy proposals. In improver to SSA, agencies such every bit the Department of Agronomics, the Department of Health and Human Services, CBO, the Congressional Research Service, and the Authorities Accountability Role accept used microsimulation models in recent years to guess the effects of policy proposals on beneficiaries of federal programs. Smith and Favreault (2013) find that microlevel data, when "combined with detailed representations of programme rules, tin inform policy past revealing interactions and trends that more aggregate analyses may neglect to capture."
MINT links demographic data from the Demography Bureau'south Survey of Income and Program Participation (SIPP) to Social Security earnings records to simulate the effects of alternative policy and economic scenarios on individual and family income. The MINT income revenue enhancement calculator statistically matches the records for individual SIPP respondents with similar records in the IRS Statistics of Income data file. The projections in this paper apply MINT version 7 (MINT7). MINTseven simulates federal income tax liability based on income tax parameters in effect through 2013, including the provisions of the American Taxpayer Relief Deed of 2012 (Public Law112-240).
MINTvii simulations begin with a representative sample of the noninstitutionalized U.S. developed resident population born after 1925, based on records from the 2004 and 2008 SIPP panels that have been matched to Social Security earnings records through 2010.x Adjusted past sample weights, the beneficiary population modeled past MINT7 represents 54.3 million persons in 2015. That number is equal to 92 percentage of the monthly average of 59.0 meg persons who received benefits from January through June 2015. Beneficiaries omitted from the MINT7 sample include those born before 1926, children, disabled individuals aged 30 or younger, and nursing abode residents.eleven
The Internal Revenue Code requires the income brackets to which each marginal tax charge per unit applies to be indexed to annual price inflation, as measured by the Consumer Cost Index. If tax brackets continue to be indexed to prices, taxes as a share of national income volition rising substantially. Consequently, long-term estimates of income taxes must assume either that the income tax will one day consume a larger percent of national income than information technology does today or that Congress will act to foreclose such an increase by adjusting the brackets upward.
MINTvii simulations assume that Congress will act to keep the proportion of national income paid equally income tax from rise substantially above its long-term historical average. Specifically, MINT models the current taxation policy of price indexing through 2023 and assumes a switch to wage indexing using the national boilerplate wage index (AWI) thereafter.12 This is a critical assumption because over time, wages—which are the largest single source of income—tend to rise faster than prices every bit labor productivity increases. For instance, the Social Security Board of Trustees states that over the period from 1967 through 2007, wages grew faster than prices past an average of 0.nine percentage points per year. The Board besides assumes that the boilerplate rate of growth of wages will exceed the average charge per unit of price inflation by about 1.1 per centum points over the side by side 75 years (Lath of Trustees 2014).
MINT simulates taxation-filing units, which in most cases are either single individuals or married couples filing joint tax returns.13 For simplicity, all revenue enhancement-filing units that include at to the lowest degree one Social Security beneficiary are called "beneficiary families," regardless of whether the unit of measurement is a unmarried person or a married couple in which one or both spouses receive Social Security benefits.
MINT Simulation Results
This section discusses the projected prevalence and relative amount of income tax liability on Social Security do good income, based on the MINT7 simulations. The charts and tables illustrate broad trends by showing the projections in five-year intervals (quinquennially).
Beneficiary Families Filing a Tax Return and Attributable Income Taxation on Benefits
Chart 1 shows the projected percentage of Social Security beneficiary families that volition file a taxation return and the percentage that volition owe income taxation on their benefits over the period 2010–2050. MINT projects that about 72 percent of beneficiary families will file an income taxation return through 2030, after which the proportion will fall slowly to most 68 percentage by 2050. The decline later on 2030 reflects assumptions of both a change from price indexing to wage indexing for tax brackets after 2023 and a reduction in the rate of growth in retirement income from pensions and other not–Social Security sources.
Chart ane.
Percentages of Social Security beneficiaries filing income revenue enhancement returns and attributable income tax on their benefits, 2010 and projected quinquennially 2015–2050
SOURCE: Author's calculations using MINT7.
As noted earlier, some beneficiaries who file income tax returns practise not pay taxes on their benefits considering their modified AGI does not exceed the taxable threshold. MINT projects that the proportion of beneficiary families that volition owe income revenue enhancement on their benefits will increase from about 47 percent in 2010 to 52 percent in 2015 and to 58 percent in 2030, then volition autumn slightly to about 56 percent past 2050. Here too, the projected decline after 2030 reflects the assumption of both the modify from toll indexing to wage indexing for tax brackets and a slowing rate of growth in retirement income from nonbenefit sources.
Share of Benefits Paid as Income Tax
Chart 2 shows the projected mean percentage of Social Security benefits paid as income tax by three beneficiary-family groups: all such families; families that file a tax return; and families that owe whatever income revenue enhancement on their benefits. Among all beneficiary families, MINT projects that the hateful percentage of do good income owed as income tax volition increment from 6.4 per centum in 2010 to 7.2 pct in 2015, to nine.vii percent in 2030, and to x.9 percentage past 2050. Considering the income thresholds for tax of benefits are stock-still in nominal dollars, long-term growth in total income volition result in a rising share of benefits beingness paid as income taxation, fifty-fifty if taxation code parameters currently indexed to toll inflation are instead indexed to wage growth in the future.
Chart ii.
Hateful percentage of Social Security benefit income owed equally income tax: Three beneficiary-family categories, 2010 and projected quinquennially 2015–2050
SOURCE: Author's calculations using MINTseven.
For casher families that must file a revenue enhancement return (regardless of whether they owe income taxes on their benefits), MINT projects the mean percentage of benefits owed as income taxation to increase from eight.2 percent in 2010 to 9.2 per centum in 2015 and to 12.2 percent in 2030. By 2040, casher families that file tax returns will owe an average of 12.9 percent of their benefits equally income tax.
For beneficiary families that must pay income tax on their benefits, MINT projects that the mean pct of benefit income owed equally income tax will increment from 11.vii percent in 2010 to 11.9 percent in 2015 and to 12.2 percent in 2030. By 2050, MINT projects that families that owe any tax on their benefits will owe 14.seven percent of their benefits as income taxation on average.
Median Percentage of Benefits Owed as Income Tax
Taxes due for the typical casher family are perchance all-time represented past the median percentage of benefits owed as income revenue enhancement. The median lies at the midpoint of the distribution, with equal numbers of families having college and lower percentages due. Chart 3 shows the projected median percentage of benefits owed as income tax among casher families in the same three groups represented in Chart 2.
Nautical chart three.
Median per centum of Social Security benefit income owed equally income tax: Three beneficiary-family categories, 2010 and projected quinquennially 2015–2050
SOURCE: Author's calculations using MINT7.
Among all casher families, the median per centum of Social Security benefits owed as income tax was zero in 2010 and is projected to exist just 0.v percent in 2015. The median income tax liability on Social Security benefits among all beneficiary families will rising to 4.eight per centum in 2030 and will then remain relatively stable over the following 20 years.
Among families that file a tax return, the median percentage of benefits paid equally income revenue enhancement was vi.6 percent in 2010 and will be vii.7 per centum in 2015. MINT projects that percentage to rise to nine.9 percent in 2030 and to 10.three percent past 2050.
Among beneficiary families that owe any income tax on their benefits, the median percentage of benefits owed as income tax was 10.4 per centum in 2010 and will ascent to 11.ane percent in 2015. MINT projects that share to accomplish 12.1 percent in 2025 so to remain stable over the post-obit 25 years. The percentage of benefits owed equally income tax volition stabilize because about families that owe income tax on their benefits volition exist in the 15 per centum marginal income tax bracket, and most of them will be paying taxes on the maximum 85 percent of benefits.
Benefit Income Owed as Income Tax Above and Below the Median
Some casher families owe considerably more or less than the median percentage of their benefits in taxes. Every bit Nautical chart 1 shows, 56–58 percent of beneficiary families volition owe some income tax on their benefits over the next several decades. Conversely, 42–44 percent of casher families will owe no income tax on their Social Security benefits in any given year, again bold that taxation brackets volition be indexed to wages rather than prices after 2023.
Under current law, the highest percentage of Social Security benefits that any family unit pays as income tax is 33.vii percent. That figure represents the product of the maximum proportion of benefit income that is taxable (85 pct) and the highest marginal income tax charge per unit (39.vi percent). In 2015, the 39.6 percentage marginal revenue enhancement rate applies to taxable income above $411,200 for single persons and to taxable income above $464,850 for married couples filing joint returns. MINT projects that less than 1 percent of beneficiaries will owe 33.vii percent of their benefits as income tax in 2015 or in any year through 2050 (non shown). In 2015, an estimated 80 percent of beneficiaries filing singly and 79 pct of married couples filing jointly are in either the xv percent or 25 percent marginal tax brackets (Tabular array two).
| Marginal tax rate (%) | Filing status | |
|---|---|---|
| Unmarried | Married, filing jointly | |
| Total | 100.0 | 100.0 |
| x.0 | five.7 | iv.9 |
| 15.0 | 36.0 | 42.9 |
| 25.0 | 43.ix | 35.9 |
| 28.0 | 11.0 | 8.0 |
| 33.0 | three.i | half-dozen.i |
| 35.0 | a | 0.seven |
| 39.vi | a | i.5 |
| SOURCE: Author'south calculations using MINTseven. | ||
| NOTE: Data are for the 52 percent of beneficiary families estimated to owe tax on their benefits. | ||
| a. Less than 0.5 percent. | ||
In addition to the median percent of benefit income owed as income taxation past casher families, Chart 4 shows the 90th-, 75th-, and 25th-percentile values. The nautical chart covers all casher families, including those that owe no income revenue enhancement on their Social Security benefits. Casher families at the 90th percentile of income revenue enhancement liability on Social Security benefits paid 15.0 percent of their benefits equally income tax in 2010; those families will owe 16.1 percentage of their benefits every bit income tax in 2015 and about 17 percentage in after years. Casher families at the 75th percentile of income tax liability paid nine.7 percent of their benefits equally income tax in 2010. MINT projects that those families volition owe eleven.4 percent of their benefits as income revenue enhancement in 2015 and about 13 pct over the menses 2025–2050. The median percentage of do good income due as income revenue enhancement among all casher families is represented by the blue line, which duplicates the blue line in Nautical chart iii, described earlier. Families at the 25th and lower percentiles of tax liability paid no income tax on their Social Security benefits in 2010, and MINT projects that they will not be required to pay income taxation on their Social Security benefits at any time in the period 2015–2050.
Chart iv.
Percentage of Social Security benefit income that is owed as income tax amidst casher families: Selected percentiles, 2010 and projected quinquennially 2015–2050
SOURCE: Author'southward calculations using MINT7.
Benefit Income Owed as Income Taxation by Total-Income Quartile
Because of the progressivity of income tax rates, higher-income families owe higher percentages of their Social Security benefits as income taxation than practice lower-income families. For example, a casher family with income in the highest quartile pays a larger percentage of its benefits as income tax than does a family in the everyman quartile. For each successive quartile, from lowest to highest, the projected percentages should increase.
To provide a consistent ground for comparing income over time, MINT projects the amounts that volition define the income-quartile boundaries among beneficiary families from 2010 to 2050, and expresses them relative to the national AWI (Table 3). For example, among beneficiary families in 2010, a family with full income equal to at least 2.273 times the national AWI was in the 4th (highest) income quartile. A beneficiary family unit was in the tertiary income quartile in 2010 if it had income between 1.223 and ii.273 times the AWI. A casher family with income between 0.624 and 1.223 times the AWI was in the 2d income quartile, and a beneficiary family with income of less than 0.624 times the AWI was in the kickoff (lowest) income quartile.
| Year | National AWI (nominal $) | Total family income relative to national AWI | ||
|---|---|---|---|---|
| 75th percentile | Median | 25th percentile | ||
| 2010 | 41,674 | two.273 | 1.223 | 0.624 |
| 2015 | 50,893 | 2.246 | 1.201 | 0.590 |
| 2020 | 63,676 | two.235 | 1.165 | 0.567 |
| 2025 | 76,831 | 2.229 | one.162 | 0.572 |
| 2030 | 93,193 | 2.179 | 1.120 | 0.549 |
| 2035 | 113,228 | two.133 | 1.089 | 0.537 |
| 2040 | 137,642 | 2.080 | ane.043 | 0.524 |
| 2045 | 167,076 | ii.005 | 1.000 | 0.506 |
| 2050 | 202,452 | 1.942 | 0.959 | 0.490 |
| SOURCE: Author'southward calculations using MINTvii. | ||||
Nautical chart 5 shows MINT projections of the mean percent of benefits paid as income revenue enhancement by beneficiary families in each total-income quartile. Total income consists of pretax cash income from all sources, including the estimated amount a family would receive if it used its financial avails to purchase an annuity. Beneficiary families in the fourth income quartile paid 13.9 pct of their benefits as income tax, on average, in 2010. MINT projects that families in the fourth income quartile will owe xiv.0 percent of their benefits every bit income tax in 2015 and fourteen.8 per centum in 2020. From 2030 through 2050, MINT projects that families in the quaternary income quartile will owe nigh 16 percent of their benefits equally income taxation.
Chart five.
Mean pct of Social Security do good income owed as income revenue enhancement among beneficiary families, by total-income quartile: 2010 and projected quinquennially 2015–2050
SOURCE: Author'south calculations using MINT7.
On boilerplate, beneficiary families in the third income quartile paid 5.0 percent of their benefits as income tax in 2010. MINT projects that those beneficiary families will owe 6.9 percent of benefits as income tax in 2015 and 8.half-dozen percentage in 2020. Over the period 2025–2050, MINT projects that beneficiary families in the tertiary income quartile volition owe an average of near 10 pct of their Social Security benefits in income taxes.
Beneficiary families in the lower half of the income distribution pay a substantially lower proportion of their benefits as income tax than do those with income above the median. Families in the second income quartile paid less than 0.5 percent of their benefits as income tax in 2010 and they will owe 1.i percentage of their benefits every bit income taxation in 2015. That proportion volition rise to 3.3 pct in 2030 and by 2050, MINT projects that families in the 2nd income quartile volition owe 4.3 percentage of their Social Security benefits in income tax. Families in the lowest quartile paid no income taxation on their benefits in 2010. MINT projects that those families will owe just i.ane percent of benefits as income taxation by 2050.
In contrast with Chart 5's mean percentages, Nautical chart 6 shows the median percentages of benefits paid as income tax past casher families within each income quartile. A family in the fourth income quartile paid a median of 12.four percent of its benefits as income revenue enhancement in 2010 and is projected to owe xiii.2 per centum in 2015 and most 14 percent thereafter. A family in the third income quartile paid a median of 3.7 percent of its benefits as income taxation in 2010 and is projected to owe 7.1 percent in 2015 and between 9 percentage and xi percent from 2025 through 2050. MINT projects that the median taxation liability for families in the second and start income quartiles will be zero throughout the period 2010–2050.
Chart vi.
Median percentage of Social Security benefit income owed equally income taxation among beneficiary families, by total-income quartile: 2010 and projected quinquennially 2015–2050
SOURCE: Writer's calculations using MINT7.
a. Because the projected median percentages for casher families in the second income quartile are aught in every year, the projected median percentages for beneficiary families in the outset income quartile are necessarily also nil in all years.
Conclusion
Social Security benefits were get-go discipline to income taxation in 1984 and since then, the proportion of casher families whose benefits are taxed has increased from less than one in ten to more than half. SSA's MINT microsimulation model, containing data on about 92 percentage of Social Security beneficiaries, projects that 52 percent of beneficiary families volition pay income revenue enhancement on their Social Security benefits in 2015. The median tax payment among all casher families volition equal less than 1 percent of benefit income in 2015; simply among but those families whose benefits are taxable, the median income taxation payment volition equal 11.1 per centum of Social Security benefits. By 2030, MINT projects that 58 percent of beneficiary families volition owe income revenue enhancement on their Social Security benefits and that the median income tax payment will equal about 5 percent of their benefit income. Among families that owe income tax on their benefits, the model projects a median payment equal to 12 percent of do good income in 2030. These estimates are based on the supposition that Congress volition amend provisions of the Internal Revenue Code that currently crave tax-bracket adjustments based on price indexing; such amendments would assure that the proportion of income paid as income tax would remain close to its current level. Otherwise, the pct of Social Security benefits that will be owed as income tax will exceed the level that MINT has projected.
Considering the progressivity of the federal income tax assures that higher-income beneficiaries pay the most taxes, the revenue enhancement of benefits reduces the internet Social Security income received by higher-income beneficiaries. In that respect, taxing Social Security benefits has the same upshot that a means exam would accept, without the administrative cost that direct means testing would entail (Goodman and Liebman 2008).14 Means tests are constructive for targeting benefits to persons who are most in need, but they can exist expensive to administer. In 2014, for example, federal expenditures for the Supplemental Nutrition Assistance Program (SNAP) were $76 billion. Of that amount, 4.9 percent ($three.7 billion) went to administrative expenses, including ways testing. Based on total Social Security expenditures of $851 billion in fiscal yr 2014, each percentage point in hypothetical expenditures needed to institute means testing would raise annual Social Security program spending past more than $viii.5 billion.
Because Congress established income thresholds beneath which Social Security benefits are tax-exempt, benefit income continues to be taxed less heavily than income from annuities and pensions. Individuals with modified AGI of less than $25,000 and married couples with modified AGI of less than $32,000 pay no income revenue enhancement on their Social Security benefit income. Considering those income thresholds are non indexed to prices or wages, the proportion of beneficiaries who pay taxes on their benefits has increased over fourth dimension. Eventually, the taxation of Social Security benefits will be roughly equivalent to the current-law taxation of pensions and annuities—which, according to the legislative history of the 1983 amendments, was Congress' intent when it gear up the threshold for taxation of benefits in nominal dollars.
Notes
1 From 1950 through 2012, the ratio of income taxes to personal income averaged 9.v percent per year. The almanac ratio was never lower than 7.two percent or greater than 11.half-dozen percent (IRS 2014).
2 For well-nigh taxpayers, modified AGI equals AGI plus tax-exempt interest income, income from foreign sources, and one-half of Social Security benefits.
3 Special rules apply to heads of households (single parents) and married couples filing separately. Complete rules for counting Social Security and Tier 1 Railroad Retirement benefits as taxable income are included in IRS (2015a).
four Pattison and Harrington (1993) draw the origins of both the income thresholds at which Social Security benefits get taxable and the pct of benefits subject field to income tax.
5 Pattison (1994) describes the 1993 provisions that increased the tax of Social Security benefits.
half dozen According to IRS instructions, "if you paid part of the cost of your pension or annuity, you are non taxed on the part of the pension or annuity you receive that represents a return of your price. The residue of the corporeality you receive is generally taxable" (IRS 2015b, 77).
vii As of 2015, a worker pays a Social Security payroll tax of 6.two percent on earnings up to $118,500. The worker's employer pays an equal amount, which is a tax-deductible concern expense. Self-employed workers are liable for the total 12.4 percent payroll tax, but they are eligible for ii tax deductions: They may reduce their cyberspace earnings from self-employment past half the amount of the Social Security payroll revenue enhancement, and they can deduct half of their Social Security tax from personal income reported on IRS Form 1040. The payroll tax deduction is a gene in determining AGI (SSA 2015a).
eight The pick of nominal-dollar thresholds was deliberate, and then that eventually the tax treatment of Social Security income would exist similar to that of pensions and annuities (Senate Finance Committee 1993).
9 Taxable income consists mainly of wages and salaries, interest, dividends, rent, royalties, capital gains, income from the auction of goods or holding, income from a farm or business organisation, annuities, pensions, alimony, unemployment compensation, and distributions from retirement accounts other than qualified Roth distributions.
10 For the 2004 SIPP console, 88 percent of survey records were matched to their Social Security earnings records. The match rate for the 2008 panel was more than than 90 percent. Characteristics of birth cohorts later 1979 are imitation rather than existence based on SIPP records.
11 MINT simulations for 2020 and later reflect samples that are successively more representative of the full population of aged beneficiaries, equally members of nascency cohorts from 1925 or earlier are replaced by members of later cohorts over time.
12 Results would be similar if the assumed date of the switch to wage indexing were a few years earlier or later. For a description of the national AWI, see https://www.socialsecurity.gov/oact/cola/AWI.html.
xiii For 2015, MINT simulates the distribution of beneficiary units to be 21 percent filing singly, 50 percent married couples filing jointly, 1 percent filing as the head of a household, and 28 percent not filing a tax return.
14 Means tests limit eligibility for authorities-provided benefits or reduce the amount of the benefit for individuals who have income or avails higher up thresholds prepare in law. Temporary Assistance for Needy Families (TANF), the Supplemental Nutrition Aid Program (SNAP), Supplemental Security Income (SSI), and Medical Assistance (Medicaid) are means-tested programs. Social Security and Medicare, as social insurance programs funded largely by payroll taxes levied on workers and their employers, are not means tested, although Medicare Part B (supplemental medical insurance) and Part D (prescription drug coverage) both charge income-related premiums to participants.
References
1979 Advisory Quango on Social Security. 1979. Social Security Financing and Benefits: Report of the 1979 Advisory Council. Washington, DC: Department of Wellness, Instruction, and Welfare, SSA.
[Board of Trustees] Lath of Trustees of the Federal Onetime-Historic period and Survivors Insurance and Federal Disability Insurance Trust Funds. 2014. The 2014 Almanac Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Inability Insurance Trust Funds. Washington, DC: Government Printing Office. https://world wide web.socialsecurity.gov/oact/tr/2014/tr2014.pdf.
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Goodman, Sarena, and Jeffrey Liebman. 2008. "The Taxation of Social Security Benefits as an Arroyo to Means Testing." NBER Retirement Research Center Newspaper No.NB08-02. Cambridge, MA: National Agency of Economic Enquiry. http://www.nber.org/aging/rrc/papers/orrc08-02.pdf.
Goss, Stephen C. 1993. "Current Approach and Ground for Considering a Change to 85-Percent Taxation of Monthly OASDI Benefits." Letter to Harry C. Ballantyne, Master Actuary, Social Security Administration.
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National Committee on Social Security Reform. 1983. Report of the National Committee on Social Security Reform. https://www.socialsecurity.gov/history/reports/gspan.html.
Pattison, David. 1994. "Taxation of Social Security Benefits Under the New Income Taxation Provisions: Distributional Estimates for 1994." Social Security Bulletin 57(ii): 44–50. https://www.socialsecurity.gov/policy/docs/ssb/v57n2/v57n2p44.pdf.
Pattison, David, and David E. Harrington. 1993. "Proposals to Change the Tax of Social Security Benefits: Options and Distributional Effects." Social Security Bulletin 56(two): 3–21. https://www.socialsecurity.gov/policy/docs/ssb/v56n2/v56n2p3.pdf.
Senate Finance Commission. Encounter U.S. Congress, Senate Commission on Finance.
Shakin, Joshua, and Kurt Seibert. 2015. "The Revenue enhancement of Social Security Benefits." Washington, DC: Congressional Upkeep Office. https://www.cbo.gov/publication/49948.
Smith, Karen Eastward., and Melissa M. Favreault. 2013. "A Primer on Modeling Income in the Well-nigh Term, Version seven (MINTseven)." Washington, DC: Urban Plant. http://www.urban.org/sites/default/files/alfresco/publication-pdfs/413131%20-%20A-Primer-on-Modeling-Income-in-the-About-Term-Version-MINT-.pdf.
[SSA] Social Security Administration. 2015a. "If You lot Are Cocky-Employed." SSA Publication No.05-10022. https://www.socialsecurity.gov/pubs/EN-05-10022.pdf.
———. 2015b. "Monthly Statistical Snapshot." https://world wide web.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/.
———. northward.d. "Social Security History: Treasury Rulings on Taxation of Benefits." https://www.socialsecurity.gov/history/it3447.html.
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Source: https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
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