Social Security retirement benefits provide much-needed income to millions of seniors who rely on this money to help cover their essential costs. Unfortunately, many seniors are losing thousands of dollars worth of these benefits every year as a result of a problematic rule.
Here's what the issue is, and some details about why a growing number of Social Security recipients get to keep less of their benefits each year.
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A 1983 change to Social Security has consequences to this day
There's a simple reason so many seniors are losing a ton of their Social Security benefits. It's because of specific laws that Congress passed in the 1980s and 1990s.
See, when Social Security was created, benefits were not taxed on the federal level. Seniors could get their money and keep all of it without giving a cut to the IRS. That changed when the program was amended in 1983, though. At that time, up to 50% of benefits became taxable as a result of a rule change designed to shore up Social Security's financial future. Then, in 1993, Congress took action again, this time taxing up to 85% of benefits for some retirees.
When the 1983 rule was put into place, fewer than 10% of people receiving retirement benefits ended up paying taxes on them. The tax was meant to hit the wealthy, not the average everyday retiree living on a fixed income. But the problem was that the amount you could earn before you found yourself paying taxes wasn't indexed to inflation.
In 1983, your benefits became partly taxable once your provisional income hit $25,000 as a single filer or $32,000 as a joint filer (provisional income is half of Social Security benefits plus some non-taxable income and all taxable income). And, in 2024, benefits become taxable at the exact same dollar amounts. This is despite the fact that the buying power of $25,000 or $32,000 has declined dramatically since the 1980s.
Retirees are losing thousands because of this problematic Social Security rule
It should be obvious that the rules related to taxing Social Security are a problem for seniors. But, to understand just how big a problem they are, it's helpful to look at the data.
While under 10% of retirees were originally hit with an IRS bill, The Senior Citizens League (a senior advocacy group) reports that around half now have to pay taxes on their benefits. And as many as 56% will owe in the coming years.
These tax bills are not small, either, with the average tax paid in 2020 coming in at $3,211. Since Social Security benefits have increased each year since 2020 as inflation has surged, those bills are even bigger now for retirees.
This means the typical senior retiree is losing over $3,000 per year of their Social Security benefits to the IRS simply because when taxes on benefits were put in place in the 1980s and 1990s, Congress didn't make sure there were automatic adjustments to the income level at which they applied. That oversight happened despite the fact that most other key Social Security numbers are adjusted due to inflation.
Sadly, the situation is only going to get worse. Congress is unlikely to take steps to increase the income limits all these years later when Social Security's financial future still remains shaky.
For future retirees, the best option may be to invest in a Roth IRA, as distributions from it don't count when determining if benefits should be taxed. For those already in or near retirement, though, it will be crucial to plan for big IRS bills, as it may already be too late to avoid them.
