Two Candidates with a Nasty Secret

By Scott Burns

In the coming election, two major candidates share a nasty secret. Twenty-five years ago the candidates voted for legislation that now hits middle-class retirees hard. Because of this legislation, many retirees now face effective income tax rates of 46 percent--- even though their household income may be less than $100,000.

Yet these same candidates are claiming that, if elected, they will help the middle class. Each candidate claims he will provide tax breaks for the 95 percent of all households with incomes under $250,000.

For retirees, that simply isn't true.

Here's the story.

In April 1983, following the recommendations of the Greenspan Commission, Congress approved major reforms of Social Security. They increased the employment tax on the self-employed. They reduced benefits for future retirees by increasing the age for receiving full benefits. And they accelerated planned increases in the employment tax.

Washington then claimed that Social Security was safe for at least 75 years. The same change also created a large surplus for Social Security. Over the next 25 years that surplus was squandered. IOUs were put in the Social Security trust fund.

The reforms also introduced the taxation of Social Security benefits. If the combination of one-half of your Social Security benefits and other income sources exceeded $32,000 for a couple or $25,000 for a single taxpayer, a portion of your benefits would become taxable. (During the Clinton administration, a still higher tax was imposed.) There have been multiple efforts to eliminate the tax, but they have not been successful.

Back in 1983 the tax affected very few people. Only a small portion of all retirees had enough income to pay the tax.

But the legislation had an odd twist.

Unlike virtually everything else in the entire tax code, the threshold for taxing benefits--- $32,000 for a joint return, $25,000 for a single return--- was not indexed to inflation. They are the same today as they were 25 years ago.  Had they been indexed to inflation, the thresholds would now be $70,389 for a joint return and $54,991 for a single return.

That's quite a difference.

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