Brief History of Social Security COLAs

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Most people know what Social Security does, but not necessarily what its purpose was intended to do.  Additionally, there are several significant changes in the Social Security laws changing the way payments are rendered and what has seriously impacted the yearly increases to maintain some semblance of keeping up with the cost of living.  The bottom line is that recipients are not keeping up with the cost of living and clearly and overwhelmingly losing purchasing power EVERY year.

PURSUANT to the Social Security website

Social Security Administration (SSA) became a sub-cabinet agency in 1939, and returned full-circle to independent status in 1995. Throughout the years, arguments had been heard in the halls of Congress that SSA should be returned to independent agency status. This debate was given impetus in 1981 when the National Commission on Social Security recommended that SSA once again become an independent Social Security Board. The 1983 National Commission on Social Security Reform (aka, the Greenspan Commission) again raised this issue and recommended a special study be commissioned of the matter. This special study was completed in 1984 and it outlined several options for making SSA an independent agency. This led to numerous legislative proposals in the ensuing years and in 1994 the legislation passed both houses of Congress unanimously.  For more detailed historical information, go here: https://www.ssa.gov/history/orghist.html  and https://www.history.com/topics/great-depression/social-security-act and https://www.pewresearch.org/short-reads/2015/08/18/5-facts-about-social-security/

Further Facts

Many changes and amendments were made over the ensuing years to broaden the scope of coverages for disabled and retirees.  More notable changes are those impacting the amount the recipient receives each year known as Cost of Living Adjustments.  Furthermore, the fact that when Social Security recipients would pay tax on the benefits received based upon certain income levels have never been indexed to inflation.

• Since a pair of 1938 Treasury Department Tax Rulings, and another in 1941, Social Security benefits have been explicitly excluded from federal income taxation. (A revision was issued in 1970, but it made no changes in the existing policy.) This changed for the first time with the passage of the 1983 Amendments to the Social Security Act. Beginning in 1984, a portion of Social Security benefits have been subject to federal income taxes.

• If an individual's provisional income - gross income, plus tax-free interest, plus one-half of Social Security benefits surpassed $25,000, up to half of their benefits became taxable at the federal rate. For couples, this figure stood at $32,000.

• In 1993, a second tier of taxation was added by the Clinton administration that allowed up to 85% of Social Security benefits to become taxable at the federal rate if an individual's or couple's provisional income topped $34,000 or $44,000, respectively.

• With the purchasing power of Social Security income on a a fairly steady decline since the start of decade, retired workers are feeling cheated out of their benefits via federal and state-level taxation - not all states tax SS benefits.

• To boot, the income thresholds associated with the taxation of benefits have never been adjusted for inflation. The thresholds introduced by the Amendments of 1983 and during the Clinton administration are still valid decades later. As cost-of-living adjustments naturally increase monthly benefits over time, more and more senior households are being taxed on the Social Security benefits they receive.

• Although the program brings in 90% of its revenue from the payroll tax on earned income, $48.6 billion in income (4% of total income) is derived from the taxation of benefits in 2022.

• The second threshold at 85% was first put into law in Social Security Act Amendments of 1993.

HARD FACTS TO NOTE

ONE 2023 FEDERAL TAX RETURN WAS REVIEWED.  THE RETURN INDICATED AN INCREASE IN GROSS SS BENEFITS OF $949.20 OVER THE PREVIOUS YEAR.  AFTER THE MEDICARE YEARLY PREMIMUM INCREASE OF $120, THE REDUCTION IN THE NET BENEFIT AMOUNTED TO $829.20.

FURTHER REVIEW SHOWED THAT BASED UPON OVERALL INCOME, 85% OF THE BENEFIT WILL BE TAXED AS A SINGLE FILING INDIVIDUAL.

IN THIS SPECIFIC EXAMPLE, THE TAX INCREASED FROM A $1,436 TAX REFUND TO A PAYMENT OF TAX OF $1,594 TO THE IRS.

THIS AMOUNTED TO A $3,030 LESS IN THE BENEFITS DUE PRIMARILY TO THE LACK OF INCOME TAX BRACKET INDEXING FOR INFLATION:  A 7.93% REDUCTION IN BENEFITS RESULTING ENTIRELY TO INCOME TAX BRACKET CREEP.

SO, WHO PAID FOR THIS SINGLE PERSON'S COLA?  THIS PERSON DID PLUS AT LEAST TWO OTHER RECIPIENTS WITH A SIMILAR RETURN.