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104 IRET Byline 1 (1992)

handle is hein.taxfoundation/iretbyln0104 and id is 1 raw text is: June 24, 1992 No. 104 Iron Threads Amongst The Gold The Senate Finance Committee has approved an amendment to the Social Security Act that would raise the Social Security earnings limit to $21,000 by 1997 and to $51,000 by 2001 for those age 66 through 69. The Committee proposes to offset the higher projected benefit payout by increasing the taxable wage base - the amount of a worker's annual earnings subject to the 12.4% retirement and disability portions of the payroll tax. By 1997, the wage base would rise to $71,700 instead of the projected $69,300 under current law; by 2001, the base would be $89,700 versus a projected $84,600 under current law. The House has passed a similar earnings limit increase without the tax increase. Raising the earnings limit would help the elderly and raise GNP between now and 2009. Raising the wage base will reduce GNP and lower employment permanently. The transitory gains from raising the earnings limit will be dwarfed in later years by the ongoing effect of the damaging tax increases on the economy. How the earnings test operates. The Social Security earnings test limits how much a beneficiary may continue to earn by working and still receive full Old Age and Survivors Insurance (OASI) retirement benefits. In 1992, the limits are $7,440 for beneficiaries under age 65 and $10,200 for beneficiaries age 65 through 69. Those over age 69 are not subject to the earnings limitation. Beneficiaries ages 62 through 64 lose $1 of Social Institute for Research on the Economics of Taxation Byin Security benefits for every $2 of wage and salary income above the limit. Beneficiaries ages 65 through 69 lose $1 of benefits for every $3 of earnings above the limit. Effect on marginal tax rates. The $1 for $2 benefit reduction is equivalent to a 50 percent marginal tax rate on a beneficiary's earnings in excess of the exempt amounts, until the excess earnings build to more than twice the social security benefits and all benefits have been lost. The $1 for $3 benefit reduction imposes a 33-1/3 percent add-on tax rate on a range of earnings equal to three times the benefits. On top of this must be added other tax rates facing the working beneficiary (such as marginal federal and state income tax rates, the payroll tax rate, and federal and state unemployment taxes.) When the various taxes are considered, marginal tax rates can become very high at moderate income levels. A single retiree age 64 with a total income of $15,000 or a married couple age 64 with total income of $19,500 could face an 80 percent to 85 percent marginal tax rate. A single retiree age 65 with income of $18,000 or a couple age 65 with income of $20,000 could face a 65 percent to 70 percent marginal tax rate. These workers get to keep only 15 to 30 cents of an extra dollar of income as a result of the earnings test. At higher incomes (over $25,000 for a single beneficiary, over $32,000 for a married couple) a beneficiary is subject to both the earnings test and the phase-in of income taxation of benefits. For these workers, the marginal tax rates on additional earnings can reach 90 percent for those 65 to 69 years of age, and can exceed 105 percent for those 62 to 64 years of age! These latter workers lose money with every added dollar they earn. The confiscatory tax rates constitute a federal ultimatum not to work! Delayed retirement credit. These penalties are more of a burden on those beginning to draw benefits between now and 2009 than on those who will retire at a later time. Workers who delay claiming benefits beyond normal IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1331 Pennsylvania Ave., N.W., Suite 515, Washington, D.C. 20004 Phone: (202) 347-9570

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