A new bipartisan proposal could change how some retirees are taxed on their Social Security benefits, particularly public sector workers who recently received retroactive payments.
Roughly 70 million Americans rely on Social Security benefits each month, but the proposed changes primarily affect retired public sector workers such as teachers, firefighters and police officers. (AFP)According to Newsweek, the No Tax on Restored Benefits Act seeks to exempt certain retroactive Social Security benefits from being counted as gross income for federal tax purposes. The bill is designed to address the unintended tax consequences following previous reforms to the social security system.
Why Bills MatterRoughly 70 million Americans rely on Social Security benefits each month, but the proposed changes primarily affect retired public sector workers such as teachers, firefighters and police officers.
Many of these retirees have had their benefits reduced or eliminated in the past because they did not pay Social Security taxes while working.
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Last year, the Social Security Fairness Act overturned two longstanding provisions, the windfall elimination provision and the government pension offset. This allows the affected retirees to receive reinstated benefits with earlier lump sum payments.
However, this lump sum pushes some retirees into higher income brackets, leading to unexpected tax bills.
What happens if you propose?The No Tax on Restored Benefits Act would exclude those retroactive payments from taxable income, preventing retirees from being penalized for what lawmakers described as a one-time fix.
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Democratic Representative Chelly Pingree of Maine, a co-sponsor of the bill, told Newsweek that the earlier reform was “truly transformative” but was never intended to create new financial burdens. He said the new law would protect retirees who were previously below the tax threshold from being “unfairly penalized” by previous benefit increases.
The bill also gained support from groups like the National Association of Police Organizations, which represents many retirees affected by the issue.
Concerns and criticismNot everyone supports the proposal. 9i Capital Group CEO Kevin Thompson told Newsweek that the bill risks becoming a political talking point, questioning why recaptured benefits should be treated differently for tax purposes.
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Alex Benny, a financial literacy instructor at the University of Tennessee at Martin, warned that the tax-exempt benefits could add to the strain on an already strained Social Security system. He noted that the reduction in tax revenue associated with benefit payments could have long-term financial consequences.
Finance expert Michael Ryan told Newsweek that the proposal is essentially “damage control” that ends up paying retirees early in 2025 with lump sum payments without enough tax withheld.
