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Q3. Which political party started taxing Social Security annuities?

A3. The taxation of Social Security began in 1984 following passage of a set of Amendments in 1983, which were signed into law by President Reagan in April 1983. These amendments passed the Congress in 1983 on an overwhelmingly bi-partisan vote.

The basic rule put in place was that up to 50% of Social Security benefits could be added to taxable income, if the taxpayer's total income exceeded certain thresholds.

The taxation of benefits was a proposal which came from the Greenspan Commission appointed by President Reagan and chaired by Alan Greenspan (who went on to later become the Chairman of the Federal Reserve).

The full text of the Greenspan Commission report is available on our website.

President's Reagan's signing statement for the 1983 Amendments can also be found on our website.

A detailed explanation of the provisions of the 1983 law is also available on the website.

Q4. Which political party increased the taxes on Social Security annuities?

A4. In 1993, legislation was enacted which had the effect of increasing the tax put in place under the 1983 law. It raised from 50% to 85% the portion of Social Security benefits subject to taxation; but the increased percentage only applied to "higher income" beneficiaries. Beneficiaries of modest incomes might still be subject to the 50% rate, or to no taxation at all, depending on their overall taxable income.

This change in the tax rate was one provision in a massive Omnibus Budget Reconciliation Act (OBRA) passed that year. The OBRA 1993 legislation was deadlocked in the Senate on a tie vote of 50-50 and Vice President Al Gore cast the deciding vote in favor of passage. President Clinton signed the bill into law on August 10, 1993.

(You can find a brief historical summary of the development of taxation of Social Security benefits on the Social Security website.)

http://www.ssa.gov/history/InternetMyths2.html

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TAX TREATMENT

Taxation of Social Security and Railroad Retirement Tier 1 Benefits

Beginning in 1984, includes in taxable income up to one-half of Social Security (and railroad retirement tier 1) benefits received by taxpayers whose incomes exceed certain base amounts. The base amounts are $25,000 for a single taxpayer, $32,000 for married taxpayers filing jointly and zero for married taxpayers filing separately. Income for purposes of figuring these base amounts includes adjusted gross income under prior law, plus nontaxable interest income, and one-half of Social Security and railroad retirement tier 1 benefits. The amount of benefits that could be included in taxable income will be the lesser of one-half of benefits or one-half of the excess of the taxpayers' combined income (AGI + one-half of benefits) over the base amount. The provision for including nontaxable interest income is intended to provide similar tax treatment of benefits received by individuals whose total incomes consist of different mixes of taxable and nontaxable income and to limit opportunities for manipulation of tax liability on benefits.

Includes in the definition of Social Security benefits for tax purposes workmen's compensation benefits to the extent they cause a reduction in Social Security and railroad retirement tier 1 disability benefits. This provision is intended to assure that these social insurance benefits, which are paid in lieu of Social Security payments, are treated similarly for purposes of taxation.

The provision applies to nonresident aliens as well as U.S. citizens. Under the Internal Revenue Code, nonresident aliens who have income from sources other than a U.S. trade or business are taxed at a flat rate of 30 percent, unless a tax treaty provides otherwise, and the taxes must be withheld at the source of payment. Thus, 30 percent of 1/2 of the Social Security benefit (15 percent of the total benefit) will be withheld from nonresident alien beneficiaries.

Provides special rules for dealing with overpayments and lump-sum retroactive benefit payments. Benefits paid to an individual in any taxable year will be reduced by any overpayments repaid during the year. Taxpayers who receive a lump-sum payment of retroactive benefits may treat the benefits as wholly payable for the year in which they receive them or may elect to attribute the benefits to the tax years in which they would have fallen had they been paid timely. No benefits for months before December 1983 would be taxable, regardless of when they are paid.

Requires the Secretary of Health and Human Services and the Railroad Retirement Board to file annual returns with the Secretary of the Treasury setting forth the amounts of benefits paid to each individual in each calendar year, together with the name and address of the individual. Also requires furnishing of similar information to each beneficiary.

Requires that amounts equivalent to estimated quarterly proceeds from the taxation of benefits be automatically deposited in the Social Security trust funds and the railroad retirement account, as appropriate, at the beginning of each calendar quarter, subject to final adjustments based on estimates by the Secretary of the Treasury. Requires an annual report by the Secretary of the Treasury concerning the transfers under this provision.

The provision is estimated to affect about 10 percent of Social Security beneficiaries in 1984. Amounts equal to the estimated tax revenues under this provision will be automatically deposited to the OASDI trust funds. The provision increases trust fund revenues by $26.7 billion for 1983-1989 and by .62 percent of taxable payroll in the long range.

http://www.ssa.gov/history/1983amend2.html

The effect of Reagan's tax cuts were at least partially offset by phased in Social Security payroll tax increases that had been enacted by President Jimmy Carter and the 95th Congress in 1977

http://en.wikipedia.org/wiki/Reaganomics#Tax_revenue

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While campaigning for President, I stressed my commitment to restore the financial integrity of the Social Security system. I pledged I would do my best to avoid increases above those already scheduled in tax rates, which fall most heavily on moderate and lower-income workers. I also promised to correct the technical flaw in the system which exaggerates the adjustment for inflation, and to do so without reducing the relative value of retirement benefits as compared with pre-retirement earnings.

I am announcing today a set of proposals which meet those commitments and which solve both the short-term and long-term problems in the Social Security system through the end of the twentieth century. These proposals are designed to:

--Prevent the default of the trust funds now predicted to occur.

--Bring income and expenses into balance in 1978 and keep them that way through the end of the century.

--Create sufficient reserves to protect the system against sudden declines in revenue caused by unemployment or other economic uncertainties.

--Protect the system's integrity beyond the turn of the century to the extent we can predict what will happen in the next 75 years.

--Provide for an orderly review and examination of the system's basic structure.

My proposals are the result of a number of hard choices. I am convinced that action is needed now, and that these steps will restore the financial integrity of the Social Security system.

I will ask the Congress to take the following specific actions:

1. Compensate the Social Security trust funds from general revenues for a share of revenues lost during severe recessions. General revenues would be used in a counter-cyclical fashion to replace the payroll tax receipts lost as a result of that portion of unemployment in excess of six percent. General revenues would be used only in these carefully limited situations. Because this is an innovative measure, the legislation we submit will provide this feature only through 1982. The next Social Security Advisory Council will be asked to review this counter-cyclical mechanism to determine whether it should be made permanent.

2. Remove the wage-base ceiling for employers. Under present law employers and employees pay a tax only on the first $16,500 in wages. Under this proposal the employer ceiling would be raised over a three-year period, so that by 1981 the ceiling would be removed. This action will provide a significant source of revenue without increasing long-term benefit liabilities.

3. Increase the wage base subject to the employee tax by $600 in 1979, 1981, 1983, and 1985, beyond the automatic increases in current law. This will provide a progressive source of financing.

4. Shift revenues from the Hospital Insurance Trust Fund to the Old Age, Survivors, and Disability Trust Funds. In part, this shift will be made possible because of substantial savings to the Medicare system from the hospital cost containment legislation that I have proposed.

5. Increase the tax rate on the self-employed from 7 percent to 7.5 percent. This will restore the historical relationship between the OASI and the DI rates paid by the self-employed to one and one-half times that paid by employees.

6. Correct certain technical provisions of the Social Security Act which differentiate on the basis of sex. This will include a new eligibility test for dependent benefits. Recent Supreme Court decisions would result in un-financed increases in the cost of the system and some inequities without this change.

These six steps, along with measures already contained in existing law, will eliminate the short-term financing problem and improve the overall equity of the Social Security system.

In order to guarantee the financial integrity of the system into the next century, two additional steps must be taken. I will be asking the Congress to:

1. Modify the Social Security benefit formula to eliminate the inflation over-adjustment now in law. This modification, known as "decoupling," should be done in a way that maintains the current ratio of retirement benefits to pre-retirement wages.

2. Adjust the timing of a tax rate increase already contained in current law. The one percent tax rate increase presently scheduled for the year 2011 would be moved forward so that .25 percent would occur in 1985 and the remainder in 1990.

Taken together, the actions I am recommending today will eliminate the Social Security deficit for the remainder of this century. They mill reduce the estimated 75-year deficit from the Trustee Report forecast of 8.2 percent of payroll to a manageable 1.9 percent.

Prompt enactment of the measure I have recommended will provide the Social Security system with financial stability. This is an overriding immediate objective.

In addition, I am instructing the Secretary of Health, Education and Welfare to appoint the independent Social Security Advisory Council required by law to meet each four years. I will ask the Council to conduct a thorough reexamination of the structure of the system, the adequacy of its benefits, the effectiveness and equity of disability definitions, and the efficiency and responsiveness of its administration. Their report, which will be issued within the next two years, will provide the basis for further improvements.

I call upon the Congress to act favorably on these major reform initiatives.

Jimmy Carter

The White House,

May 9, 1977.

http://www.ssa.gov/history/carterstmts.html#system

Even Social Security’s current cost-of-living adjustment understates the true impact of inflation on elderly recipients, who spend far more on health care than anyone else – including annual increases in Medicare premiums.

http://robertreich.org/post/38349329185