Older workers may soon make
more -- and pay more taxes
House Republicans, fresh from passing a bill
to reduce the marriage tax, now have retirement funds in their sights.
President Clinton included several tax proposals
to encourage retirement savings in his budget. Congress is approaching
retirement from the other side: the earnings potential of senior
Every year, more than 800,000 people over age
65 lose all or part of their Social Security benefits because of
limits placed on how much other income they may earn. With seniors
living longer and many wanting -- or needing -- to work beyond traditional
retirement age, the earnings limit has come under fire in recent
But retirees shouldn't start updating resumes
just yet. While many will profit from bringing home a bigger paycheck
to supplement retirement benefits, some seniors may find the tax
ramifications not so appealing. Earning extra money might mean you
will owe Uncle Sam for previously untaxed retirement benefits.
When Social Security was created in 1935, the earnings test was
used to help move older workers out of the labor force so that younger
ones, many with new or growing families, could fill scarce jobs.
Currently, workers between 65 and 69 can earn
no more than $17,000 or they will lose some Social Security payments.
At that pay level, federal retirement benefits are reduced by $1
for every $3 that is earned over the cap. The earnings limit is
increased yearly: to $25,000 next year and $30,000 by 2002. When
workers reach 70, there is no earnings cap.
How the Social Security earnings limit
|Ida is 66 years old
and receives $417 a month from Social Security (about $5,000
annually). This year Ida takes a part-time job as a cashier,
earning $18,500. This is how the earnings test will affect her:
Ida's earnings in 2000
Earnings limit in 2000
Ida's earnings in excess of the limit
Benefit reduction in 2000 = 1/3 of the excess
|The earnings test
will cost Ida $500 of her Social Security benefits
this year -- an entire monthly benefit ($417)
and part of a second monthly payment ($83).
Source: House Ways and Means Social Security
Capitol Hill consensus is that the Depression-era
earnings limit has outlived its usefulness and legislators want
to eliminate it completely.
The Senior Citizens Freedom to Work Act, H.R.
5, would allow retirees to continue earning any amount and still
receive all their Social Security benefits. Workers who are 65 can
retire now with full benefits, with the age rising to 67 by 2027.
The law would be retroactively effective for any money earned this
The Ways and Means Social Security subcommittee
unanimously approved the measure on Feb. 16, and it is likely to
continue smoothly through the House for final approval. On the Senate
side, Finance Committee Chairman William Roth has endorsed the bill,
and President Clinton says he would sign the legislation as long
as it comes to him with no extraneous provisions.
-- and tax -- tradeoffs
So why all the bipartisan legislative agreement on senior workers?
The key reason is that Baby Boomers, a large
and politically active group, see their fast-approaching retirement
as a continuation of current lifestyles. Many want to keep working
and still get all the Social Security they've paid for through payroll
taxes. Many people perceive a retirement earnings test as a tax
on their labor, says Social Security Commissioner Kenneth Apfel.
Secondly, although scrapping the earnings limit
would cut into the federal treasury, proposal advocates say there
are factors that counter -- and eventually could reduce -- the initial
In testifying before the Ways and Means subcommittee,
Aldona Robbins of the Institute for Policy
Innovation pointed to the Texas think tank's study showing that
after 2000, the bill's cost would decline for two reasons:
- The increase in the earnings limit -- to
$25,000 in 2001 and $30,000 in 2002 -- enacted by Congress in
1996: Since these caps are going up anyway, there will be only
a short-term budgetary hit by eliminating the limit now.
- The delayed
retirement credit increases benefits for people who postpone
retirement past the normal age: Instituted in 1972, the credit
increases the Social Security benefit for every year a worker
postpones retiring until age 70. In 1983, Congress adjusted the
law further and now workers born in 1938 who delay retirement
will receive a 6.5 percent credit for each year they do not collect
benefits. The yearly credit will increase, reaching 8 percent
for those born in 1943 or later. For individuals who work a partial
year, the yearly percentage is broken into monthly increments.
The increase stops at age 70, regardless of when a worker starts
collecting benefits. This means more potential retirees are likely
to delay collecting benefits longer in order to get bigger checks
Finally, these new employees would once again
pay into the income tax system. And this is what seniors will have
to evaluate if they go back to work.
Currently, retirees who receive only Social Security or railroad
retirement benefits are not taxed on those payments.
Other private retirement benefits also may be
tax-free, depending upon how the retirement plan is structured.
For example, if a plan included contributions a worker made after
paying taxes on contributed money, then that portion of the retirement
payout is not taxable. However, any earnings on the pension fund
or contributions the employer made or money a worker added to the
account before taxes were taken out is taxable.
The amount of retirement money that ultimately
is taxed is determined by adding retirement funds plus other income
-- whether it's earned at a job or from investments, including any
that comes from a spouse -- to see if it reaches a federally set
base amount threshold. When the threshold is met, generally 50 percent
and possibly 85 percent of a retiree's Social Security benefits
The base amount is reached by combining one-half
of a retiree's benefits and his or her other income. This year,
some benefits may be taxable if the base amount is greater than:
- $25,000 for single, head of household, or
a qualifying widow or widower filers.
- $25,000 for married filing separately filers
who lived apart from a spouse for all of
- $32,000 for married filing jointly filers.
- $0 for married filing separately filers who
lived with a spouse at any time during 1999.
your benefits taxable?
This Internal Revenue Service worksheet is a quick way to
check whether some of your benefits may be taxable.
Write in the amount from box 5 of all
your Forms SSA-1099 and RRB-1099. Include the full amount
of any lump-sum benefit payments received in 1999, for
1999 and earlier years. (If you received more than one
form, combine the amounts from box 5 and write in the
If the amount on line A is zero or less, stop here;
none of your benefits are taxable this year.
of the amount on line A
||Add your taxable
pensions, wages, interest, dividends, and other taxable
income and write in the total.
||Write in any tax-exempt
interest (such as interest on municipal bonds) plus any
exclusions from income (listed below).
||Add lines B, C,
and D and write in the total
Exclusions to be added in line D:
Interest from qualified U.S. savings bonds,
Employer-provided adoption benefits,
Foreign earned income or foreign housing,
Income earned in American Samoa or Puerto
Rico by bona fide residents.
Compare the amount on line E to your base
amount for your filing status. If the amount on line E equals
or is less than the base amount for your filing status, none
of your benefits are taxable this year. If the amount on line
E is more than your base amount, some of your benefits may
Once the base amount meets the applicable taxable
level, then retirees have additional computations to determine how
much -- 50 to 85 percent -- of their retirement money is taxable.
Generally, higher total income means more of your retirement benefits
Figuring the precise taxable amount depends
upon individual filing factors. Worksheets and examples to help
retirees are found in Internal
Revenue Service Publication 915, Social Security and Equivalent
Railroad Retirement Benefits.
Is a post-retirement job worth the extra paperwork
and possible taxation of previously tax-free benefits? Most legislators
think so. But if you're considering re-entering the workforce, be
sure to do the math first.
-- Posted Feb. 25, 2000