The answer is "maybe."
Some people who get Social Security benefits have to pay income taxes on them. This will apply to you only if you have other substantial income in addition to your benefits (for example, wages, self-employment, interest, dividends and other taxable income that you have to report on your tax return). No one pays taxes on more than 85 percent of his or her Social Security benefits and some pay on a smaller amount, based on these IRS rules:
- If you file a federal tax return as an "individual" and your combined income* is between $25,000 and $34,000, you may have to pay income tax on 50 percent of your Social Security benefits. If your combined income is above $34,000, up to 85 percent of your Social Security benefits is subject to income tax.
- If you file a joint return, you may have to pay taxes on 50 percent of your benefits if you and your spouse have a combined income* that is between $32,000 and $44,000. If your combined income is more than $44,000, up to 85 percent of your Social Security benefits is subject to income tax.
- If you are married and file a separate tax return, you probably will pay taxes on your benefits.
*On your 1040 tax return, your "combined income" is the sum of your adjusted gross income, plus nontaxable interest, plus one-half of your Social Security benefits.
So basically, the answer is generally going to be yes, but it's not fully taxable - at the most, you pay taxes on 85% of it, and if you're surviving on SS benefits alone, you most likely will not be getting enough to be taxed. So for people that -need- the money because it's their only income, no taxes. For people who have savings, work-based retirement funds, whatever, then they'll get taxed on up to 85%.
Ok, fair enough.
How does Bush's proposed plan work?
According to this:
Your social security tax would be split; part of it would pay into the current fund or some future version of it, and some of it would be "yours" to "invest" in a few limited choices of funds. Since they'd be taking out some money from the social security fund, these "private accounts", or as they've been called more recently, "personal accounts", would have to average a return rate of 3% better than inflation for 35 years in order to break-even with the current system.
Except... that you don't get the money back in the form of a check - you get to use the money to purchase an annuity which will provide a monthly check for life. And when you "cash out" to buy that annuity, the money you "receive" to "purchase" the annuity is taxable. After you've purchased the annuity, if there is money left over, it is yours to keep.
In other words, even that "3%" number seems to be misleading, since as I understand it you also will pay income taxes on the entire amount, vs. at most 85% (and as little as 0%) with the current social security scheme. So realistically, you need to beat inflation by considerably more than 3% to even break-even with the current social security plan - and this plan does nothing to improve the solvency of the program, and by many estimates it will even make it worse.
So. Can someone briefly explain to me what the benefit is to anyone other than an expert investor who can actually expect to beat inflation, consistently, by large amounts, over an extended period of time (35+ years) despite being hobbled by only having access to a few limited funds to choose from? I'm not too good at this sort of thing, so use small words and simple language, please. Because it seems to me that Bush's proposed plan will screw the vast majority of people, quite royally, and I don't get what the upside is, other than "owning" the experience of being screwed.