John Kasich to seniors who want to keep their Social Security: “get over it”

[True Earthling]

134. SS benefits are already means tested..higher wages subject to SS tax are replaced at a lower rate

then benefits are subject to a progressive tax based on income...

“Why Aren’t Social Security and Medicare Means Tested?”

https://www.ced.org/blog/entry/why-arent-social-security-and-medicare-means-tested

But to begin, some backup for the (to some) surprising assertion. The notion that Social Security (Medicare discussion to follow) is not means tested flows from a fairly simple view of the program’s cash benefits. Retirees who earned comparatively higher wages receive higher benefits than those who earned lower wages, the reasoning would go, therefore the program cannot possibly be means tested. Furthermore, the amount of wages subject to the payroll tax that funds the program is capped – and therefore the tax is regressive, and so the overall program must be pro-rich and anti-poor.

But as some understand, that simple reasoning misses two key aspects of the program’s operations. First, the program’s benefit formula favors lower-wage workers. Benefit amounts are based on the lifetime earnings history. The first dollars of a worker’s wages are replaced at a 90 percent rate. Earnings in a second bracket (mechanically like an income-tax-rate bracket) are replaced at a 32 percent rate. And any earnings above that level are replaced at only a 15 percent rate. Thus, although higher-wage workers receive more dollars in absolute terms, they receive less back in Social Security benefits per dollar of tax paid over their lifetimes. At the extremes, the difference in the implicit rate of return on those contributions is enormous.

The second key program feature is that a fraction of Social Security benefits can be subject to income taxation, on a progressive basis – and then the income tax that applies to those included benefits itself is progressive. Once a beneficiary’s total income (including half of Social Security benefits) exceeds $25,000 ($32,000 for a married couple), the first dollar of benefits begins to be taxable, up to inclusion of one-half of benefits. And once income (including half of Social Security benefits) exceeds $34,000 ($44,000 for a married couple) the portion of benefits included in taxable income begins to rise further, up to a maximum inclusion of 85 percent of benefits. This provision is designed to have no effect on the low-income elderly, while gradually increasing its impact as total incomes rise.

The Social Security Administration estimates that the average beneficiary in 2013 received an annual benefit of $15,528. If that person had no other income, he or she would owe no income tax – on Social Security benefits or anything else (although that person certainly would not enjoy a luxurious lifestyle based on that benefit). As incomes from whatever source rise above the $25,000 threshold noted above, benefits progressively become subject to tax, at income tax rates that start at 10 percent and rise according to the total amount of taxable income. Tax is calculated after a $3,900 personal exemption and a $7,600 standard deduction (for single persons of age 65 or older). Thus, a beneficiary with a taxable income of $11,500 (from taxable Social Security benefits or any other source) would owe no income tax, with tax beginning to accumulate above that level only at the bottom-bracket 10 percent rate.

The theoretical maximum annual benefit in 2013, for a lifelong maximum wage earner retiring at the full eligibility age, was $30,396. If that person also received other income of roughly $40,000, the full 85 percent of that person’s benefit would be subject to income taxation. At the absolute upper end of the scale, a beneficiary in the highest income tax rate bracket with 85 percent of benefits subject to tax would pay tax on benefits at the margin at a rate equal to about 34 percent (that is, 85 percent of the 39.6 percent top-bracket tax rate). And to get into that top income tax rate bracket, that taxpayer would need to have a taxable income, after the personal exemption and any standard or itemized deductions, of over $400,000.

In other words, the income tax due on Social Security benefits is quite progressive, with benefits for probably most of the elderly not subject to tax at all, but with more than a third of benefits paid back in income tax by the most well-off. Taking into account the lower benefit-formula conversion rates that apply to high-wage retirees, their after-tax returns on their lifetimes of payroll tax contributions, measured in investment terms, would be quite modest – if not in some instances negative (further reflections on that fact later). So Social Security is means tested in reality, if not in name.