The Foolish Genius Behind Social Security Taxes
Editor’s Note: Two weeks ago, we featured a guest article from Manward Press founder Andy Snyder. He scratched the surface of a complex and hotly debated topic: our nation’s massive retirement funding shortfall and the dissolution of Social Security. His article ruffled some feathers for sure… but he’s not finished. Read below for Part 2, and be sure to leave a comment with your thoughts.
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Not only did we open a can of worms with our recent column on Social Security, but we shook the rusty old tin and spewed the wriggly critters all over the room.
It’s clear there’s mass confusion about the subject of our nation’s not-so-secure Social Security program.
I hate to tell you, but that’s part of the plan. After all, if Americans weren’t coughing from Washington’s smoke and running into themselves thanks to the mirrors… they’d be rioting in the streets.
If they knew they were getting less than 2% on their money and were getting $24,000 in annual income versus the $100,000 or more they could get if they held on to their money, they’d march on Washington.
But, alas, our lawmakers are smart. They hide the truth, they promise a quick fix (enough to get your vote) and they kick our can of worms further down a dimly lit alley.
Let’s be clear. Our nation’s “retirement” program is broke. It’s going to take more than a short-term fix.
But what’s most important is that you understand why it’s broke and what it means to you.
Readers sent us all sorts of questions after we published our first essay on Social Security. Many of them showed just how confused Americans are when it comes to this Ponziest of Ponzi schemes.
Here’s perhaps the most telling comment from Manward-thinking reader Dan O.
I find your statement in the current newsletter – “Right now, the tax on Social Security income is responsible for more than 6.5% of all money that’s paid out. Soon enough, the number will rise to close to 10%.” – hard to believe without a bit more content to back it up.
Please let me know how you come to that number. As I understand it, you only owe taxes on one-half of your payment received (the part your employer contributed with pretax money). If your payment was near the max of around $30,000 per year, only $15,000 would be subject to taxes, and if you were in the 35% bracket that would be approximately $5,250 in taxes. I don’t have any idea what the percentage is of people receiving the max who are in the top tax bracket, but I suspect it is a small percentage of the overall people relying on Social Security.
Looking forward to being enlightened.
Thanks for the comment, Dan. Kudos for paying attention and yearning to fill in the blanks.
Here’s the deal. You’re almost right. You’d be 100% right if it were 1992. But in ’93, the fine folks in Washington stuck their hands out for more.
They changed the law. They added a second set of thresholds.
When Clinton signed the 1993 Omnibus spending bill into law, anybody with income of more than $34,000 ($44,000 for couples) began paying taxes on 85% of their Social Security income. Previously, as Dan rightly states, they paid taxes on just half their benefits.
At first, the change in the tax law wasn’t a big deal. Only 10% of recipients saw their tax rates change. Politicians lost few votes.
But, alas, these fools are geniuses. Let’s not forget Washington ensured that none of these figures would adjust for inflation. That key fact was not an accident.
This “below board” tactic is a sneaky way to raise tax revenues without ever raising tax rates. As incomes rise with inflation, more and more folks climb over Washington’s static income benchmark.
The numbers show the powerful effect of this devious tactic.
Getting Poorer by the Day
Get this… when Clinton quietly increased tax rates in 1993, just 18.2% of recipients paid taxes on their Social Security benefits.
That number is 40% today. And those taxes reduce incomes by an average of 6.7%.
And if nothing changes, a whopping 56% of us will pay taxes on our Social Security income by 2050… reducing payouts by some 10%.
Again, all this without a politician ever casting a vote.
This ghost tax hike is exactly why Americans collectively pay more than $32 billion in taxes on their benefits each year. And, as we discussed in that first article, it’s exactly why Trump’s plan to tweak thresholds could send the system into a tailspin.
The Social Security program is addicted to that growing stream of money.
The complexity of this generations-old system is hard to fathom. Politicians have used all sorts of gimmicks and gadgetry to make short-term patches to the program and buy themselves enough votes for the next election.
But they didn’t create a system that you can depend on.
No, our financial system – especially the programs created by our elected leaders – is filled with smoke and mirrors. It’s critical we explore all nooks and crannies and do our very best to understand what’s going on.
If not, your pockets will get light. These folks have fast hands.