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Author: fingfool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19891  
Subject: SS: Tax Rate Increases with Inflation Date: 6/5/2001 6:17 PM
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I follow this board but not comprehensively enough to know whether this issue has been raised before. If it has, I would like to be linked to the posts.

Our federal taxes are indexed for inflation such that the effective tax rate will not change over the years in terms a constant inflation adjusted taxable income with the exception of certain income level taxpayers who are receiving SS payments. The exception occurs because the $32,000 and $44,000 figures used to calculate the amount of taxable SS are not indexed for inflation. Obviously if the income stays sufficiently low over the years, none of the SS is taxable so the exception does not apply. On the other extreme of high incomes, the maximum amount of the SS income is taxed from the start and inflation has little or no effect on the effective tax rate. In the middle income level, however, the effective tax rates do increase with inflation.

I am curious as to how many people are aware of this situation. It is my contention, that regardless of your feelings about whether SS should be defined as a savings program or welfare, whether it should be taxed or not and whether it should privatized or not or for that matter whether it eventually should be eliminated, the politicians in Washington do not nor intend to do a decent job of informing the American public about such matters. SS is used for a political football and it will continue until more of the public becomes better informed.

Below I have tabled the results of some effective tax rate (taxes owed/(total SS + PAGI income)) calculations for a couple collecting $30,000 in SS payments at age 65 with an average inflation rate of 3% per year over the next 25 years. The deductions start at $14,450 and the I used PAGI amounts varying from $30,000 to $70,000 per year. All these starting numbers were adjusted by increasing 3% each year for 25 years. The effective tax rates were then calculated for years 1 through 25. I used the year 2000 tax rates.

PAGI Year1Rate Year25Rate
30K 5.6% 9.5%
40K 8.7% 14.5%
45K 11.0% 17.0%
70K 21.2% 25.7%


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