Receiving Benefits & Paying Taxes

Posted on April 16, 2022

Receiving Benefits & Paying Taxes

 Everyone with an income is required by law to pay taxes, but when it comes to receiving the benefits that the state provides to its citizens, some taxpayers receive more than what they pay in taxes.

Eugene Steuerle, an economist at the Urban Institute, explains that a couple who earned average wages and retired in 1990, would have paid less taxes and collected more benefits than a couple earning average wages, who retired in 2010. Money CNN elaborates on the shift:

“Couples now in their early 40s will have forked over $808,000 in Social Security taxes by the time they retire, but get back only $703,000 in benefits.

The Urban Institute included payroll taxes paid by both the employee and employer, but did not include the portion used for Social Security’s disability insurance program. Since 2000, taxes for just the retirement program have totaled 10.6% — 5.3% from the employee and the same from the employer. The levy is paid on income up to a certain threshold — $113,700 for 2013. The institute said it adjusted its calculations for inflation plus 2%, about what a person could have traditionally realized in savings had they put the money in the bank.

So why is the shift happening now? It’s because the first waves of recipients saw their promised benefits rise without sufficiently large tax increases to pay for them, Steuerle said. Rates rose significantly after the program was overhauled in 1983.”

While the benefits may be unequal, when it comes to Medicare, almost all taxpayers receive more than what they pay. Couples retiring in 2010 will have paid an average of $122,000 in Medicare taxes and may receive up to $427,000 in benefits. Even though that sounds profitable for taxpayers, there are a growing number of retirees that are collecting and fewer workers that are paying into the Medicare system.

According to Money CNN, “The system is now paying out more in benefits than it collects in income, with the difference coming from the so-called trust fund, the result of surplus revenue previously paid into the system. But the trust fund is set to run out in 2033, after which the program will only be able to pay about three-quarters of promised benefits, according to the Social Security trustees.

Steuerle summarises the problem beautifully: “What we are paying into the system is paying for our parents’ benefits, but it’s not clear what that entitles us to get from our kids.”