Many retirees are eagerly counting down the days until the Social Security cost-of-living adjustment (COLA) for 2023 is announced in October. This increase could be the biggest in decades, with a real possibility that it will be at least 8.5%.
Even if the COLA is as high as predicted, it pales in comparison to another pay hike that could be on the way. Roughly 56% of Social Security recipients would get a huge raise with one proposed change.
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Earn it, keep it
Rep. Angie Craig (D-Minn.) recently introduced to the U.S. House of Representatives what she calls the "You Earned It, You Keep It Act." This bill would completely eliminate taxes on Social Security benefits.
Under Craig's proposal, Social Security benefits wouldn't be changed at all. Instead, it would change the internal revenue code to exclude taxing any income from Social Security.
Not every Social Security recipient would benefit from this change. However, the Social Security Administration estimates that around 56% of recipients will pay federal income taxes on part of their Social Security benefits between 2015 and 2050.
Individuals who make less than $25,000 and married couples filing jointly who make less than $32,000 don't pay taxes on their Social Security benefits. For those who make more than these thresholds, up to 50% of Social Security benefits are taxed for individual income between $25,000 and $34,000 or between $32,000 and $44,000 for a married couple filing jointly. Up to 85% of benefits can be taxed for income above $34,000 for individuals or above $44,000 for couples.
The rates for federal taxes range from 10% to 37%, depending on the amount of income generated. The "You Earned It, You Keep It Act" would significantly boost the amount of after-tax income for many Social Security recipients.
Who will pay for it?
While Rep. Craig's proposed bill would increase the amount of money that many retirees make, it would also reduce the amount of money flowing into the federal government's coffers from taxing Social Security benefits. As you probably expected, that shortfall would be offset by increasing taxes on other Americans.
Currently, annual income above $147,000 isn't subject to Social Security payroll taxes. Craig wants to raise the cap for individuals who make more than $250,000 per year.
This threshold excludes most Americans. The top 5% of U.S. households had incomes of $273,740 or more in 2020, according to the U.S. Census Bureau.
Prospects of passing
Should over half of Social Security recipients get ready for a large tax cut and corresponding big raise? Probably not.
The bill has been assigned to the House Energy and Commerce Committee for review. So far, the committee hasn't taken any action on it. Skopos Labs, a company that uses artificial intelligence to predict the potential passage of proposed legislation, projects that the "You Earned It, You Keep It Act" has only a 2% probability of being enacted.
Time is also a factor. Based on the RealClearPolitics analysis of the most recent polls, the GOP seems likely to get at least a narrow majority in the U.S. House of Representatives after the November elections. It's doubtful that Rep. Craig's proposed changes would gain enough support to pass with a Republican House majority.
It could be a tall order for federal taxes on Social Security benefits to be eliminated anytime soon. However, Social Security recipients at least can look forward to what should be a large COLA for 2023.
