As of January 2018, nearly 62 million people, more than 42 million of which are retired workers, were receiving a monthly Social Security benefit, according to the Social Security Administration. Over time, as baby boomers retire and longevity marches higher, this number is expected to balloon higher. In fact, close to 80% of nonretirees in Gallup's April 2017 survey expect to be reliant in some capacity on Social Security during their golden years. 

Will your Social Security payout be enough when you retire?

Yet there are growing concerns that Social Security may not be able to provide what retired workers need in retirement to make ends meet. In 2017, the Social Security Board of Trustees released its latest report, highlighting the expectation that the program will begin paying out more in benefits than it's generating in revenue by 2022, ultimately leading to a complete depletion of its $3 trillion in asset reserves by 2034.

Dice next to a piece of paper that reads, Will Your Social Security Be Enough?

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The good news here is that Social Security's payroll tax, which is collected on earned income between $0.01 and $128,400, as of 2018, will keep money coming into Social Security's Trust. Unfortunately, it won't be enough to keep the current payout schedule sustainable beyond 2034. The trustees are forecasting an across-the-board cut in benefits of up to 23%. With 62% of current retirees leaning on Social Security for half of their monthly income, a potential 23% cut is huge. 

But this is far from the only worry. There's an even more near-term issue that's just as concerning for middle-class retirees: taxation.

More than half of all senior households pay tax on their Social Security benefits

In 1983, the Reagan administration signed into law the last sweeping overhaul of Social Security as a result of a 75-year deficit in the program that's about a third of what it is today. The Amendments of 1983, among other things, gradually raised the full retirement age over a period of four decades to reduce the long-term expenditures of Social Security, and they introduced the taxation of Social Security benefits at the federal level.

Beginning in 1984, and for every year since, 50% of a beneficiary's payout is taxable if adjusted gross income (AGI) is higher than $25,000 as a single filer, or $32,000 as a couple filing jointly. In 1993, the Clinton administration added another tier, allowing 85% of Social Security benefits to be taxed at the federal level if a single taxpayer's AGI tops $34,000, or $44,000 for couples filing jointly. 

A Social Security card lying atop IRS tax form 1040, and next to a pair of glasses and twenty dollar bill.

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When signed into law in 1983, the taxation of Social Security benefits was only expected to affect one out of 10 senior household. Today, however, according to The Senior Citizens League (TSCL), it's affecting 56% of senior households. That's because the income thresholds tied to federal taxation have never been adjusted for inflation. As incomes have grown, more and more seniors are finding themselves subject to taxation on their Social Security benefits. We're at the point where it's specifically hitting middle-class senior households right in the pocketbook.

Get ready to be taxed even more!

Were this not bad enough, the recently passed Tax Cuts and Jobs Act is going to make it even likelier that Social Security recipients pay tax on their benefits in the years ahead.

The Tax Cuts and Jobs Act was the first sweeping tax reform this nation has seen in more than 30 years. While it was designed to cut taxes for most Americans, it may have a long-term net-negative impact on retirees, thanks to its newly implemented inflationary tether.

Under the old tax system, ended Dec. 31, the Consumer Price Index for All Urban Consumers, or CPI-U, acted as the measure of inflation for the federal income-tax brackets. As the CPI-U moved, so did the income ranges tied to each of the seven progressive tax brackets from one year to the next.

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However, the Tax Cuts and Jobs Act introduced a new measure known as the Chained Consumer Price Index. Though the CPI-U and Chained CPI measure inflation somewhat similarly, the Chained CPI takes into account substitution bias. In other words, if the price of a good or service increases a lot, it assumes consumers will trade down to a lesser-priced good or service. For example, it beef prices rice, consumers will trade down to pork or chicken. Though substitution does reflect a consumer behavior, it'll ultimately mean that inflation rises at a slower pace than it did under the CPI-U, which doesn't take substitution bias into account.

What's this all mean? The income ranges associated with each progressive tax bracket will rise more slowly each year. Therefore, taxpayers should be slowly pushed into higher tax brackets over time, including seniors receiving Social Security benefits.

As TSCL noted recently, in 2014 senior households were paying an estimated tax that equaled 6.7% of benefit income. By 2039, this is expected to grow to 9% of benefit income. 

In short, benefits could be slashed by up to 23% to sustain the program, all while the taxation of benefits continues to erode what middle- and upper-income retirees receives each month. Not the rosiest forecast for those reliant on Social Security.

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