Give Social Security Recipients a Break

Limit payroll taxes for those over 65, and stop taxing benefits.



As deliberations about tax reform begin in earnest, Congress should consider a simple fix to help millions of older Americans: Eliminate Social Security and Medicare payroll taxes after age 65 on the first $50,000 of earned income. These Americans have already contributed to the two programs over a lifetime. Yet even after they hit the retirement age, they continue to pay Social Security and Medicare taxes on income they earn.

This reform could significantly benefit seniors with modest incomes. Nearly 20% of people 65 and over are still working—more than eight million in all—according to the Bureau of Labor Statistics. Of people 65 and older who reported income in 2014, about 80% took in less than $50,000, according to the Administration on Aging. The median was just over $22,000. This proposal would boost their spending power significantly.

Take a 70-year-old woman who earns $25,000 a year in California. Today the combined Social Security and Medicare tax on that income is approximately $1,900. Federal and state taxes further reduce her take-home pay to roughly $21,000. Exempting her from Social Security and Medicare taxes effectively would increase her spending power by more than 9%. She is likely to put that additional $1,900 toward day-to-day living expenses. It’s enough to have a real positive effect on her quality of life. 

The tax change could give seniors an added incentive to work. This is often a good choice, given today’s longer life expectancies and the crisis of low retirement savings. In a March study by the Employee Benefits Research Institute that surveyed more than 1,000 American workers, nearly half said their household’s savings and investments—excluding the value of a primary home and any defined-benefit pension plans—totaled less than $25,000.

The pace of savings tends to pick up later in people’s careers, and the Government Accountability Office reported in 2015 that Americans 65 to 74 had median household retirement savings of nearly $150,000. That’s great. But it isn’t enough. It won’t kick off much in the way of steady income over 20 years of retirement.

Many Americans cannot rely on savings and Social Security alone for a comfortable retirement. Working longer would make a difference, since it allows savings to continue to grow. Half of respondents in the EBRI survey said they plan to continue working after age 65.

This easy tax change would create a big economic boost by leaving money—more than $13 billion, by my estimation—in the pockets of working older Americans, who would directly inject it into the economy. At the same time, it would help keep experienced workers in the labor force, while encouraging some who are already retired to get back in.

While lawmakers are looking at it, they should also consider eliminating taxes on Social Security benefits for those who draw them while continuing to work. Today those benefits are subject to tax once someone earns only $25,000. After being taxed for a lifetime to fund Social Security, the program’s benefits are taxed upon receipt. That’s akin to double taxation. Eliminating it is another easy fix worth consideration in the spirit of fairness.

These straightforward proposals ought to draw bipartisan support. There are no complicated credits or calculations. For those 65 and over, simply eliminate the payroll tax on income up to $50,000 and stop taxing Social Security benefits. This fits with America’s longstanding support for older adults. Seniors at the low end of the income scale shouldn’t have a bite taken out of their paychecks and put into the pot for Social Security and Medicare. They’ve paid their dues already.

Mr. Schwab is founder and chairman of the Charles Schwab Corp.

Appeared in the May. 16, 2017, print edition.

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