This Social Security Rule Change Has to Happen to Avoid More Retirees Losing Benefits Each Year

Social Security's retirement benefits program has many complicated rules. Many of those rules help ensure that the program remains effective at supporting seniors over time, even as inflation increases the cost of living.

For example, retirees receive a Social Security COLA (cost-of-living adjustment) most years, which increases benefits based on rising prices. The maximum income subject to Social Security tax also goes up each year, as does the amount you can earn while collecting Social Security benefits before some benefits are temporarily withheld if you're under full retirement age.

Unfortunately, there's one rule in place that doesn't consider how inflation affects the real value of money. And if this rule doesn't change, more seniors will lose retirement income every year.

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This Social Security rule causes a growing number of seniors to bring home less Social Security income

The Social Security rule that doesn't change concerns the threshold at which benefits become taxable.

Traditionally, Social Security benefits were not subject to federal income tax. But, to fix past financial shortfalls, reforms in the 1980s and 1990s introduced two tiers of taxes, with seniors owing tax on up to either 50% or 85% of benefits, depending on their provisional income. The provisional income that counts for this calculation is half of all Social Security, all taxable income, and some non-taxable income.

The thresholds put into place at this time were $25,000 for single tax filers and $32,000 for married tax filers. With provisional income above these limits, taxes start kicking in. And once provisional income exceeds $34,000 for single filers and $44,000 for married filers, then tax on up to 85% of benefits applies.

These thresholds don't change, and more retirees hit them each year as wages rise. So, more seniors pay.

The One Big Beautiful Bill Act did not fix this either, despite a promise of no tax on Social Security, as that bill simply introduced a new temporary senior deduction through 2028 that allows some seniors 65 and over to reduce taxable income so they come in below the threshold. The underlying rules remain the same.

A growing number of retirees are hit with a tax bill

The failure to increase the tax thresholds has led to a substantial increase in the number of retirees who lose part of their Social Security income to the IRS.

As The Senior Citizens League (TSCL) explains, when the tax was created, fewer than 10% of Social Security recipients owed it. Now, it's close to 50% and growing. This catches many seniors off guard, with around 51% of respondents to a TSCL survey not expecting to owe tax on benefits.

Of course, the downside of raising the tax thresholds is that Social Security will collect less revenue, which could worsen its already precarious financial situation.

Still, the tax hits some seniors hard, and indexing the thresholds to inflation -- as most other Social Security benefits are -- could help ensure that more and more people don't suddenly owe tax every year due to normal wage growth.

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