Taxability of Social Security Benefits after the Repeal of the Earnings Test

Abstract

Congress recently repealed the provision in the social security statutes that reduced a beneficiary's benefits when his or her earnings exceeded certain thresholds, frequently referred to as the earnings test. This provision was viewed by many as unfair, and one that provided the wrong incentives, especially since it did not apply to beneficiaries who were over age 69. More recently, the House Ways and Means Committee has reported and the House of Representatives has passed a bill to reduce the maximum amount of social security benefits subject to income taxation from 85 percent to 50 percent of the benefit. This study investigates the marginal tax on social security benefits under current law so interested parties can evaluate the marginal tax and its potential effect on retirees' behavior.

For an earlier report by the author on this topic, see Tax Notes, Oct. 22, 1990, p. 469.