More than one in four Social Security beneficiaries have up to 50 percent of their Social Security benefits subject to a tax because their adjusted gross income plus nontaxable interest income and one-half of their Social Security benefits exceed $25,000 for single persons and $32,000 for married couples. The revenue raised reverts to the Social Security trust funds. Beginning in 1994, about 15 percent of beneficiaries were taxed on up to 85 percent of their benefits if their annual adjusted gross income plus tax-exempt interest in half of their Social Security benefit exceeded $34,000 for single filers and $44,000 for married couples filing jointly. The revenue raised from taxing the additional 35 percent of benefits is credited to the Hospital Insurance (Medicare) trust fund and not to Social Security. Over time, an increasing number of beneficiaries will have their benefits taxed because, unlike most other tax thresholds, the Social Security tax thresholds are intentionally not indexed for inflation.
AARP recognizes that the additional taxation of benefits (assuming the receipts are deposited in the Social Security trust funds) could improve the program's long-term health, but we remain concerned that any further increases will result in an unanticipated heavy tax burden for many retired middle and moderate income beneficiaries. For example, a couple, both 72 years old, with $15,000 in Social Security benefits and $15,000 in pensions and savings would face a $1,900 tax increase if 85 percent of their benefits were taxed. Also, fully taxing benefits could bring millions of older Americans who currently do not pay any income taxes back onto the tax rolls. Since moderate income beneficiaries rely heavily on Social Security, the increased tax burden would be significant, and many of those affected would be unable to recoup lost income. Thus, AARP believes no further action to increase the taxation of Social Security benefits should be taken until careful study is given to the distributional consequences of taxing benefits beyond current law.
