It is public knowledge that Social Security is financial backbone for millions of Americans. However, a new proposal has been put on the table called the “You Earn It, You Keep It Act.” This could change how the system works by eliminating federal taxes on Social Security benefits.
For many retirees, this sounds like welcome news. No more worrying about the IRS taking a slice of their monthly checks. However, there are implications.
Why Social Security Benefits Are Taxed
Social Security was created in the 1930s and benefits were not taxed. However as the years went by, the rules changed, and some beneficiaries had to federal income tax on their checks.
At present, up to 50% of Social Security benefits may be taxed by married couples filing jointly with a combined income of $32,000 to $44,000 and by single beneficiaries with a combined income of $25,000 to $34,000. Up to 85% of benefits may be subject to taxation for individuals with a combined income of above $34,000 or couples earning over $44,000.
What the Bill Would Do
The new proposed bill will eliminate federal income tax on Social Security benefits and beneficiaries would be able to keep their full benefits without the concern about keeping money aside for tax.
There are millions who are living on a fixed income, and this could be major help for them. It would ease the financial burden and allow more money for food, rent, utilities and healthcare. These are essential expenses.
The Hidden Cost
Now, even though the idea of larger checks sound good, it’s important to remember that taxes on Social Security is money that is used to help fund the program.
Should the tax on Social Security be mitigated completely, the trust funds could run out even faster that it was predicted. Current data shows that the trust fund is expected to be depleted by 2034 if no changes are made. This would lead to benefit cuts.
Removing this tax revenue could push the system over the edge even sooner, making the problem worse instead of better.
Who Wins and Who Loses
The proposal would create clear winners and losers:
- Winners: This would benefit current retirees as well as low-income individuals as they would be able to see more money in their pockets.
- Losers: Future retirees, who could face earlier and deeper cuts if Social Security runs out of money faster.
Possible Fixes
Some experts say the bill could work. Ideas include:
- Raising the cap on taxable income. Currently, only wages up to $168,600 (in 2024) are taxed for Social Security.
- Instead of completely mitigating taxes on Social Security, officials could phase it out.
- Small increases in payroll taxes. A little increase distributed among workers could generate enough revenue to make up for the loss.
The tax relief strategy should be combined with other funding sources to protect Social Security for future generations.
What It Means for You
As the cost of living increases, retirees will rejoice at every measure to ensure that they get the maximum out of their Social Security benefits. However, this could be a problem for the younger generation of workers. If the program runs out of funds faster, their benefits may be cut.
The Bottom Line
The You Earn It, You Keep It Act seems like a win for millions of Americans but other measures need to be consider ensuring the sustainability of Social Security for future generations. This is a program that millions rely on. The major question is: do we prioritize immediate relief for current retirees, or do we focus on making sure Social Security is still there for the next generation?