Taxation on Social Security benefits has not been adjusted for inflation since 1984, meaning a policy once meant to tax wealthier recipients now affects a rising share of Coloradans.
Sound familiar? With Amendment 87, this ‘bracket creep’ problem will become familiar to more Coloradans than just the wealthy, despite how it is advertised.
Social Security Bracket Creep
For single-filer Social Security recipients whose combined Adjusted Gross Income (AGI), plus nontaxable interest, plus one-half of their Social Security benefit is above $25,000, 50 percent of their benefits will be taxable; above $34,000, 85 percent is then taxable.
This might have actually made sense when Colorado’s average annual benefit for retired workers was $10,848 in 2003.
However, now that Colorado’s average annual benefit for retired workers is $25,956 (before other income is added), more retirees are likely being taxed on their Social Security benefits in Colorado every year.
But only the federal and state governments prosper from this “secret tax.” As benefits rise with Cost-of-Living Adjustments (COLAs) and as other retirement income increases (pensions, IRAs, withdrawals, interest), more beneficiaries are pushed above the threshold each year without any change in rates or real living standards.
Unforeseen Consequences
It still might not sound like a big deal to some Coloradans who don’t expect to cross into Amendment 87’s higher marginal tax brackets in their lifetime.
But let’s look at the opportunity cost of higher income taxation for individuals and the economy.
Every $1 a 50-year-old earns could be worth $2.85 at a normal retirement at age 65, if invested in the market and based on average market returns. For a 40-year-old, that number is $7.34; for a 30-year-old, it’s $23.06; and for a 20-year-old, it is $88.35.
So, for every dollar in the government’s hands versus an individual’s, it’s a dollar with considerable future earning potential that is now spent on things with less guaranteed return on investment, less efficiency, and, most importantly, less say.
This is earning potential that can make someone less reliant on government entitlements like Social Security, improving economic freedom and helping the US debt problem.
If invested in the economy, these dollars would produce more of the things we love at a lower cost, improving the economy, our retirement accounts, and everyone’s standards of living.
Instead, measures like Amendment 87 would take this money from individuals, even if their living standards and purchasing power have not improved, and spend it on inefficient–and already bloated–government programs.
Compound interest is the eighth wonder of the world for a reason—its effects appear gradual at first; people don’t realize how wealthy they are until the last years before retirement, and people don’t realize how bad their economy is until the collapse is undeniable.
Once Coloradans understand how many government tax policies have conveniently never been indexed for inflation, they will realize how little their decision-makers understand or care about keeping Colorado prosperous.
