Tax All Social Security Benefits for Higher-Income Earners

Social Security benefits have been partially taxable since 1983. Tax liability depends on combined income, defined as adjusted gross income, tax-exempt interest, and half of Social Security benefits. Single filers earning below $25,000 (joint below $32,000) owe no tax on benefits. For single filers earning between $25,000 and $34,000 ($32,000 and $44,000 joint), up to 50 percent of benefits are taxable.

Above those thresholds, up to 85 percent of benefits are taxable. This treatment is similar to the treatment of other retirement income: post-tax retirement contributions are not taxed upon withdrawal, while pre-tax contributions are taxed upon withdrawal. Employer contributions to Social Security are like pre-tax contributions, and the resulting benefits should be subject to tax, while employee contributions are like post-tax contributions, and the resulting benefits should not be subject to tax.

This option taxes all Social Security benefits for high-income taxpayers, phasing in between $125,000 and $150,000 for single filers or $250,000 to $275,000 for joint filers. Raising the portion of benefits included in taxable income would increase marginal tax rates on income and discourage work amongst retirees. As a result, hours worked and economic output would fall.

On a conventional basis, this option would decrease the primary deficit by $102.7 billion over the budget window. Long-run GDP and GNP would fall slightly. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 175.1 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.1 percent, with the changes concentrated among upper-income taxpayers. On a long-run dynamic basis, taxpayers would see a 0.1 percent decrease on average.