It's an oft-bemoaned fact that Social Security doesn't pay seniors enough money to live comfortably. Of course, not being able to live on Social Security alone really shouldn't come as a shock to retirees, as those benefits were never meant to fully replace working wages. But even seniors who do the responsible thing and secure income outside of Social Security often find that their benefits fall short for one big reason -- they're subject to taxes.
However, it's not just the fact that benefits are taxable that's the problem. What's also troublesome is that the rules surrounding taxes on benefits haven't changed in years, and that's just one of the reasons why seniors on Social Security keep losing buying power and struggling during retirement as a result.
How taxes on Social Security work
Many seniors are shocked to learn that their Social Security benefits are subject to taxes. Whether these taxes come into play or not depends on provisional income, which is the sum of non-Social Security income plus 50% of one's annual benefit.
For single tax-filers, a provisional income of $25,000 to $34,000 means there's the potential to be taxed on up to 50% of benefits, while a provisional income beyond $34,000 opens the door to taxes on up to 85% of benefits. For those who are married filing taxes jointly, these thresholds are a bit higher, though they're also not doubled, putting couples at a potential disadvantage. Married folks with a provisional income between $32,000 and $44,000 risk taxes on up to 50% of their benefits, and beyond $44,000, that tax threshold increases to 85%, as it does for singles.
As if taxes on benefits weren't bad enough, compounding the issue is the fact that these income thresholds have been in place for decades, while the cost of living has continued to rise. In 1983, the Social Security Act Amendments established income thresholds for the initial 50% taxation of benefits. In 1993, the Omnibus Budget Reconciliation Act established the higher 85% threshold. But since then, there's been no adjustment to the aforementioned income limits, which means seniors have effectively been robbed of a portion of their benefits over the course of the past three decades.
Here's another way to look at it. An item that would've cost $1 in 1983 would cost $2.61 today, while an item purchased for $1 in 1993 would cost $1.80 today. Since the value of the dollar has eroded since the limits for provisional income were established, seniors have been stuck paying taxes based on outdated measures of so-called wealth.
A single senior living on a $35,000 annual income today, for example, is by no means living large, even in lower-cost areas of the country. Yet based on outdated income thresholds, that same senior would be subject to taxes on up to 85% of their Social Security income.
It's for this reason that lawmakers need to consider changing the income thresholds that have been in place for far too long. Social Security recipients are eligible for an annual cost-of-living adjustment, or COLA, to retain buying power as prices go up, so the concept of adjusting for inflation isn't new in the world of Social Security. This same idea, however, needs to be applied to provisional income so seniors on Social Security are allowed to keep more of the benefits they desperately need to survive.