________________________________________________________________________

Report on the Taxation of

Social Security and Railroad Retirement Benefits

in Calendar Years 1994, 1995, and 1996 ________________________________________________________________________

Report to the Congress,

the Secretary of Health and Human Services,

and the Railroad Retirement Board

Department of the Treasury

January 2001


TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION AND SUMMARY........................................................ 2

CHAPTER 2: METHODOLOGY AND ESTIMATES OF THE TAX LIABILITY

ATTRIBUTABLE TO THE TAXATION OF SOCIAL SECURITY

BENEFITS FOR CALENDAR YEARS 1994, 1995, and 1996................. 5

I. Methodology ............................................................................................... 5

II. Estimates of Tax Liability Attributable to the

Taxation of Benefits in 1994....................................................................... 6

III. Estimates of Tax Liability Attributable to the

Taxation of Benefits in 1995....................................................................... 9

IV. Estimates of Tax Liability Attributable to the

Taxation of Benefits in 1996..................................................................... 11

CHAPTER 3: METHODOLODGY, ESTIMATED TRANSFERS, AND ADJUSTMENTS

TO TRANSFERS FOR CALENDAR YEARS 1994, 1995, AND 1996

LIABILITY................................................................................................ 13

I. Methodology for Estimated Transfers....................................................... 13

II. Methodology for Adjustments to Estimated Transfers ............................. 14

III. Estimated Transfers and Adjustments to Transfers

for Calendar Year 1994 Liability .............................................................. 14

III. Estimated Transfers and Adjustments to Transfers

for Calendar Year 1995 Liability .............................................................. 15

IV. Estimated Transfers and Adjustments to Transfers

for Calendar Year 1996 Liability .............................................................. 15

CHAPTER 4: FORECAST OF TRANSFERS TO TRUST FUNDS FOR 1997-2001 .. 18

I. Forecast Methodology............................................................................... 18

II. Forecasts of Annual Transfers to the Trust Funds .................................... 18

CHAPTER 5: ANALYSIS OF TAXABLE SOCIAL SECURITY BENEFITS IN

CALENDAR YEARS 1992 THROUGH 1997......................................... 21

I. Distribution of Taxable Social Security Benefits by Family

Economic Income Class for Calendar Years 1994 through 1996 ............. 21

II. Comparison of Income Sources for Tax Years 1992 through 1997.......... 21

III. Effect of OBRA 1993 on Taxable Social Security Benefits

for Calendar Years 1994 through 1996 ..................................................... 22
2

CHAPTER 1: INTRODUCTION AND SUMMARY

I. Introduction

Since January of 1984, the Treasury Department has been required to estimate the

individual income tax liabilities attributable to the inclusion of Social Security and Railroad

Social Security Equivalent benefits in adjusted gross income (AGI) for each liability year.

These estimated liabilities are transferred to the Federal Old Age and Survivors Insurance

(FOASI), Federal Disability Insurance (FDI), and Social Security Equivalent Benefit Account

(SSEBA) trust funds on a quarterly basis. Beginning in 1994, transfers have also been made

to the Federal Medicare Insurance trust fund (FHI). The amounts transferred to these trust

funds are calculated as the difference between forecasts of tax liabilities made with, and

without, the inclusion of forecasted levels of benefits in AGI. Both the taxation of benefits

and the transfers to the trust funds are required by the Social Security Amendments of 1983

(P.L. 98-21), as amended by the Railroad Retirement Solvency Act of 1983 (P.L. 98-76), the

Consolidated Budget Reconciliation Act of 1985 (P.L. 99-272), and the Omnibus Budget and

Reconciliation Act of 1993 (OBRA 93) (P.L.103-66). The 1983 Act also required that

correcting adjustments be made to the amounts transferred to the trust funds if the estimates

of the tax liability attributable to the benefits are subsequently shown to be incorrect.

In addition, P.L. 98-21 required the Treasury Department to submit annual reports

to the Congress, the Secretary of Health and Human Services, and the Railroad Retirement

Board containing both a description of the methodology used to estimate the transfers to the

trust funds and a forecast of transfers over the five subsequent years. The Treasury

Department's Office of Tax Analysis (OTA) is responsible for preparing these annual reports,

as well as for estimating transfers to the trust funds and calculating correcting adjustments

to the transfers based on actual tax return data. This report covers a three year period,1 and

describes the methodology used to determine (1) the estimated transfers to the trust funds for

calendar years 1994, 1995, and 1996 income tax liability attributable to the inclusion of

benefits in AGI, (2) the necessary correcting adjustments to the transfers for calendar years

1994, 1995, and 1996, and (3) the forecast of liability and transfers for the 1997 through

2001 period.

To determine if any benefits were taxable in tax year 1994, 1995, or 1996, taxpayers

had to add both tax-exempt interest income and one-half of Social Security and Railroad

Social Security Equivalent benefits to AGI. This augmented AGI may be referred to as

provisional income. If provisional income exceeded thresholds of $25,000 for single filers

and $32,000 for joint filers, taxpayers were required to include in AGI the lesser of one-half

of the benefits or one-half of the excess of provisional income over the thresholds.

OBRA 93 expanded the amount of benefits included in AGI for the highest income

beneficiaries, and provided that the additional income tax revenue be transferred to the FHI

trust fund. For tax years beginning on or after January 1, 1994, the provisional income
3

thresholds of $25,000 for single filers and $32,000 for joint filers remained in effect for

calculating the 50 percent of benefits inclusion rule. However, the benefit inclusion in AGI

was increased for higher income beneficiaries. For beneficiaries with provisional incomes

above $34,000 for single filers and $44,000 for joint filers, adjusted gross income included

the lesser of:

(1) 85 percent of the recipient's Social Security or Railroad Retirement Tier I

benefit

or

(2) the sum of

(a) the smaller of (i) the amount included under the lower thresholds or

 (ii) $4,500 (for single filers) or $6,000 (for joint filers)2

plus

(b) 85 percent of the excess of the recipient's provisional income over the

applicable secondary provisional income threshold.

Certain married beneficiaries not filing joint returns had a provisional income

threshold of zero. The adjusted gross income of these individuals included the lesser of 85

percent of the beneficiary's Social Security or Railroad Social Security Equivalent benefit or

85 percent of the recipient's provisional income. Thereby, for the highest income

beneficiaries, a maximum of 85 percent of Social Security or Railroad Social Security

Equivalent benefits were includable in AGI. None of the provisional income thresholds are

indexed for inflation.

II. Summary

For calendar year 1994, OTA initially estimated that the tax liability attributable to

partial inclusion of Social Security and Railroad Social Security Equivalent benefits was

$9,979 million.3 Based on this estimate, transfers of $5,729 million, $301 million, $3,897

million, and $52 million were made from the general fund to the FOASI, FDI, FHI, and

SSEBA trust funds, respectively. These transfers, on net, exceeded the amount of tax

liability calculated from actual 1994 tax return data by $893 million. Transfers to the

FOASI, FHI and the SSEBA trust funds were overstated by $334 million, $558 million, and

$4 million, respectively. Transfers to the FDI trust fund were understated by $3 million.

Correcting adjustments to the FOASI, FDI, and SSEBA trust funds were made in July 1997.

The correcting adjustment for the FHI trust fund was made in September 1997.

For calendar year 1995, OTA estimated that the tax liability attributable to the partial

inclusion of Social Security and Railroad Social Security Equivalent benefits was $10,273

million. Based on this estimate, transfers of $5,929 million, $333 million, $3,961 million,

and $50 million were made from the general fund to the FOASI, FDI, FHI, and SSEBA trust

funds, respectively. On net, the amount of tax liability calculated from actual 1995 tax return
4

data exceeded the amount transferred by $578 million. Transfers to the FOASI, FDI, FHI,

and SSEBA trust funds were understated by $460 million, $32 million, $77 million, and $9

million, respectively. Correcting adjustments to the FOASI, FDI, FHI, and SSEBA trust

funds were made in January 1999.

For calendar year 1996, OTA estimated that the tax liability attributable to the partial

inclusion of Social Security and Railroad Social Security Equivalent benefits was $10,779

million. Based on this estimate, transfers of $6,279 million, $364 million, $4,079 million,

and $57 million were made from the general fund to the FOASI, FDI, FHI, and SSEBA trust

funds, respectively. On net, the amount of tax liability calculated from actual 1996 tax return

data exceeded these transfers by $1,902 million. Transfers to the FOASI, FDI, FHI, and

SSEBA trust funds were understated by $1,083 million, $51 million, $750 million, and $18

million, respectively. Correcting adjustments to the FOASI, FDI, and SSEBA trust funds

were made in October 1999. The correcting adjustment to the FHI trust fund was made in

January 2000.

Chapter 2 presents the OTA’s methodology for estimating liability along with a

comparison of the estimates with calculated amounts of 1994, 1995, and 1996 income tax

liability attributable to the partial inclusion of benefits in AGI. The methodology for

estimated transfers and adjustments to estimated transfers along with the correcting

adjustments for estimated 1994, 1995, and 1996 liabilities are presented in Chapter 3. The

forecast of 1997-2001 liabilities by trust fund and the estimated transfers to the trust funds

are presented in Chapter 4. Chapter 5 describes the distribution of taxable benefits by

income class for tax years 1994, 1995, and 1996. It also contains analyses of the sources of

AGI for taxpayers with taxable Social Security benefits and the effect of OBRA 93 on the

amount of taxable Social Security benefits and taxes from Social Security benefits.
5

CHAPTER 2: METHODOLOGY AND ESTIMATES OF THE TAX

LIABILITY ATTRIBUTABLE TO THE TAXATION OF SOCIAL

SECURITY BENEFITS FOR CALENDAR YEARS 1994-1996

I. Methodology

The Office of Tax Analysis (OTA) is responsible for estimating the annual tax

liability attributable to the partial inclusion of Social Security and Railroad Social Security

Equivalent benefits received in AGI, estimating quarterly transfers from the general fund to

the trust funds based on these estimates, and calculating correcting adjustments to amounts

initially transferred. OTA provides this information to the Treasury Department's Financial

Management Services, which has the authority to transfer funds from general revenue to the

trust funds.

OTA estimated the amount of 1994, 1995, and 1996 tax liability attributable to the

inclusion of Social Security benefits in AGI using results from OTA’s Individual Income Tax

Model (ITM).4, 5 The ITM contained information from a stratified random sample of

110,000 tax returns selected from the Internal Revenue Service's Statistics of Income (SOI)

file for 1989, various imputations of data not available from tax returns, and a tax calculator.6

 Records on the ITM file were extrapolated to future years. Computations based on the ITM

were weighted to produce results that were representative of the entire population of

taxpayers.

Individual tax returns alone do not provide sufficient data to estimate the revenue

effects of the partial inclusion of Social Security and Railroad Retirement benefits in AGI.

Therefore, imputations were added to the ITM to compensate for the missing data. The

Social Security Administration and the Railroad Retirement Board provided information on

the total amounts of benefits paid to recipients. These amounts were distributed among

appropriate taxpayers on the ITM using, as a guide, two important data sources --- (1) a file

of form SSA-1099 and form RRB-1099 information returns for tax year 1989 that are

matched to the 1989 SOI file; and (2) the most recent Current Population Survey data from

the Census Bureau to aid in matching benefits to recipients who were not required to file a

tax return. For purposes of extrapolating the ITM, total Social Security and Railroad Social

Security Equivalent benefits were projected to grow at the rate indicated in the most recent

benefits forecast provided by the Social Security Administration and the Railroad Retirement

Board.7

The tax calculator used the information (including the imputations and extrapolations

discussed above) for each filing unit to calculate the estimated Federal income tax liability

of each taxpayer on the model. Results from the ITM were then obtained by estimating tax

liabilities with, and without, Social Security and Railroad Social Security Equivalent benefits

included in AGI. 

The ITM accounted for changes in the effects of the various tax provisions resulting

from the inclusion of these benefits in AGI. That is, the use of deductions and credits, as
6

well as calculations of alternative minimum tax liabilities, can be affected by the inclusion

of benefits in AGI. For example, as AGI increases, a lesser amount of medical, casualty and

certain miscellaneous expenses may be deducted. On the other hand, the increased tax

liability resulting from the inclusion of benefits in AGI enables some taxpayers to use tax

credits that otherwise might not be usable in that year. The ITM calculated both the

percentage of total benefits included in AGI as a result of the special benefit inclusion

formulas and the average marginal tax rates applicable to the taxable benefits. Final

estimates of tax liability attributable to the partial inclusion of benefits were produced by

supplementing results from the ITM with a spreadsheet model that allowed OTA to blend

parameter estimates from the ITM with more recent tax return processing data, not available

when the ITM was extrapolated, and the most current tax collection information.

II. Estimates of Tax Liability Attributable to the Taxation of Benefits in

Calendar Year 19948

Table 1.A compares the assumptions and parameters used for the final estimate of tax

liability with the parameters calculated from actual tax return and benefits data from calendar

year 1994. The top section of Table 1.A shows that OTA estimated that 13.67 percent of

$322,093 million in benefits were included in AGI and taxed at an average marginal tax rate

of 22.66 percent, resulting in estimated total liability of $9,979 million. The bottom section

of the table shows that, based on calendar year 1994 tax return and benefits data, 12.31

percent of $321,118 million in benefits were included in AGI and taxed at an average

marginal tax rate of 23.02 percent, resulting in actual tax liability of $9,086 million.

The total liability estimate was the sum of the estimates of the tax liability

attributable to the partial inclusion of FOASI, DI, and SSEBA benefits. The top section of

Table 1.A shows that OTA initially estimated that 14.75 percent of $279,518 million of

FOASI benefits paid out in 1994 would be included in AGI and taxed at an average marginal

tax rate of 22.81 percent, resulting in estimated tax liability of $9,401 million. The bottom

section of the table shows that, based on calendar year 1994 tax return and benefits data,

13.25 percent of $278,537 million in FOASI benefits were included in AGI and taxed at an

average marginal tax rate of 23.26 percent, resulting in actual tax liability of $8,569 million.

Recipients of FDI benefits have, on average, lower incomes than FOASI

beneficiaries. Therefore, the estimated inclusion rates for benefits in AGI and average

marginal tax rates for FDI beneficiaries are lower than those for FOASI recipients. The top

section of Table 1.A shows it was estimated that 6.49 percent of $37,741 million in FDI

benefits would be included in AGI and taxed at an average marginal tax rate of 20.18

percent, resulting in estimated tax liability of $494 million. The bottom section of the table

shows that, based on calendar year 1994 tax return and benefits data, 6.08 percent of $37,717

million in FDI benefits were included in AGI and taxed at an average marginal tax rate of

19.62 percent, resulting in actual tax liability of $450 million.

Railroad SSEBA beneficiaries have, on average, incomes that are slightly lower than

FOASI beneficiaries, but higher than FDI recipients. The top section of Table 1.A shows it
7

was estimated that 8.58 percent of $4,836 million in SSEBA benefits would be included in

AGI and taxed at an average marginal tax rate of 20.24 percent, resulting in estimated tax

liability of $84 million. The bottom section of the table shows that, based on calendar year

1994 tax return and benefits data, 6.87 percent of $4,864 million in SSEBA benefits were

included in AGI and taxed at an average marginal tax rate of 20.06 percent, resulting in

actual tax liability of $67 million.
8

TABLE 1.A

Comparison of Parameters Used to Estimate Tax Liability

Attributable to the Partial Inclusion of Benefits in AGI

with Parameters Calculated from Actual Amounts 1/

Calendar Year 1994

Benefit Source

Total

Benefits

Paid

($millions)

Benefits

Includable

In AGI

 (percent)

Tax Rate on

Benefits

Includable

In AGI

(percent)

Tax

Liabilities

($millions)

Estimate Parameters 2/

Federal Old-Age and Survivors Insurance 279,518 14.75 22.81 9,401

Federal Disability Insurance 37,741 6.49 20.18 494

Railroad Social Security Equivalent Benefits 4,836 8.58 20.24 84

 Total 322,093 13.67 22.66 9,979

Actual Parameters 3/

Federal Old-Age and Survivors Insurance 278,537 13.25 23.26 8,569

Federal Disability Insurance 37,717 6.08 19.62 450

Railroad Social Security Equivalent Benefits 4,864 6.87 20.06 67

 Total 321,118 12.31 23.02 9,086

Department of the Treasury

 Office of Tax Analysis

1/ Estimated tax liabilities were updated on a semi-annual basis. The table compares the parameters used in the

final estimates of tax liability with the parameters derived from actual tax return and benefits data. Rounding of

results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the benefits

paid figures.

2/ Source: The total benefits paid data are estimates provided by the Social Security Administration and the

Railroad Retirement Board; the other data are estimated from the Office of Tax Analysis Individual Income Tax

Model.

3/ Source: The total benefits paid data are derived from the 1998 Annual Statistical Supplement to the Social

Security Bulletin (Tables 4.A1 and 4.A2), the Social Security Administration and the Railroad Retirement Board;

the tax liability data come from the Internal Revenue Service's Individual Master File.
9

III. Estimates of Tax Liability Attributable to the Taxation of Benefits in

Calendar Year 1995

Table 1.B compares the assumptions and parameters used for the final estimate of tax

liability with the parameters calculated from actual tax return and benefits data from calendar

year 1995. The top section of Table 1.B shows that OTA estimated that 13.40 percent of

$337,578 million in benefits were included in AGI and taxed at an average marginal tax rate

of 22.7 percent, resulting in estimated total tax liability of $10,273 million. The bottom

section of the table shows that, based on calendar year 1995 tax return and benefits data,

13.58 percent of $336,301 million in benefits were included in AGI and taxed at an average

marginal tax rate of 23.76 percent, resulting in actual total tax liability of $10,851 million.

The total liability estimate was the sum of the estimates of the tax liability

attributable to the partial inclusion of FOASI, FDI, and SSEBA benefits in AGI. The top

section of the Table 1.B shows that OTA estimated that 14.45 percent of $291,453 million

of FOASI benefits paid out in 1995 would be included in AGI and taxed at an average

marginal tax rate of 22.92 percent, resulting in estimated tax liability of $9,651 million. The

bottom section of the table shows that, based on calendar year 1995 tax return and benefits

data, 14.66 percent of $290,507 million in FOASI benefits were included in AGI and taxed

at an average marginal tax rate of 23.96 percent, resulting in actual tax liability of $10,207

million.

Recipients of FDI benefits have, on average, lower incomes than FOASI

beneficiaries. Therefore, the estimated inclusion rates for benefits in AGI and average

marginal tax rates for FDI recipients are lower than those for FOASI beneficiaries. The top

section of Table 1.B shows OTA estimated that 6.62 percent of $41,200 million in FDI

benefits would be included in AGI and taxed at an average marginal tax rate of 19.89

percent, resulting in estimated tax liability of $542 million. The bottom section of the table

shows that, based on calendar year 1995 tax return and benefits data, 6.54 percent of $40,866

million in FDI benefits were included in AGI and taxed at an average marginal tax rate of

20.81 percent, resulting in actual tax liability of $556 million.

SSEBA beneficiaries have, on average, incomes that are slightly lower than FOASI

beneficiaries but higher than FDI recipients. The top section of Table 1.B shows OTA

estimated that 8.15 percent of $4,925 million paid in SSEBA benefits would be included in

AGI and taxed at an average marginal tax rate of 19.93 percent, resulting in estimated tax

liability of $80 million. The bottom section of the table shows that, based on calendar year

1995 tax return and benefits data, 8.13 percent of $4,928 million in SSEBA benefits were

included in AGI and taxed at an average marginal tax rate of 21.96 percent, resulting in

actual tax liability of $88 million.
10

TABLE 1.B

Comparison of Parameters Used to Estimate Tax Liability

Attributable to the Partial Inclusion of Benefits in AGI

with Parameters Calculated from Actual Amounts 1/

Calendar Year 1995

Benefit Source

Total

Benefits

Paid

($millions)

Benefits

Included

in AGI

 (percent)

Tax Rate on

Benefits

Included

in AGI

(percent)

Tax

Liability

($millions)

Estimate Parameters 2/

Federal Old-Age and Survivors Insurance 291,453 14.45 22.92 9,651

Federal Disability Insurance 41,200 6.62 19.89 542

Railroad Social Security Equivalent Benefits 4,925 8.15 19.93 80

 Total 337,578 13.40 22.70 10,273

Actual Parameters 3/

Federal Old-Age and Survivors Insurance 290,507 14.66 23.96 10,207

Federal Disability Insurance 40,866 6.54 20.81 556

Railroad Social Security Equivalent Benefits 4,928 8.13 21.96 88

 Total 336,301 13.58 23.76 10,851

Department of the Treasury

 Office of Tax Analysis

1/ Estimated tax liabilities were updated on a semi-annual basis. The table compares the parameters used in the

final estimates of tax liability with the parameters derived from actual tax return and benefits data. Rounding of

results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the benefits

paid figures.

2/ Source: The total benefits paid data are estimates provided by the Social Security Administration and the

Railroad Retirement Board; the other data come from the Office of Tax Analysis Individual Tax Model.

3/ Source: Total benefits paid data are derived from the 1998 Annual Statistical Supplement to the Social Security

Bulletin (Tables 4.A1 and 4.A2), the Social Security Administration and the Railroad Retirement Board; the tax

liability data are from the Internal Revenue Service's Individual Master File.
11

IV. Estimates of Tax Liability Attributable to the Taxation of Benefits in

Calendar Year 1996

Table 1.C compares the assumptions and parameters used for the final estimate of tax

liability with the parameters calculated from actual tax return and benefits data from calendar

year 1996. The top section of Table 1.C shows that OTA estimated that 13.89 percent of

$351,872 million in benefits were included in AGI and taxed at an average marginal tax rate

of 22.05 percent, resulting in estimated total tax liability of $10,799 million. The bottom

section of the table shows that, based on calendar year 1996 tax return and benefits data,

14.99 percent of $350,441 million in benefits were included in AGI and taxed at an average

marginal tax rate of 24.15 percent, resulting in actual total tax liability of $12,681 million.

The total liability estimate was the sum of the estimates of the tax liability

attributable to the partial inclusion of FOASI, FDI, and SSEBA benefits in AGI. The top

section of the Table 1.C shows that OTA estimated that 14.99 percent of $302,533 million

of FOASI benefits paid out in 1996 would be included in AGI and taxed at an average

marginal tax rate of 22.28 percent, resulting in estimated tax liability of $10,106 million. 

The bottom section of the table shows that, based on calendar year 1996 tax return and

benefits data, 16.25 percent of $301,319 million in FOASI benefits were included in AGI and

taxed at an average marginal tax rate of 24.37 percent, resulting in actual tax liability of

$11,391 million.

Recipients of FDI benefits have, on average, lower incomes than FOASI

beneficiaries. Therefore, the estimated inclusion rates for benefits in AGI and average

marginal tax rates for FDI recipients are lower than those for FOASI beneficiaries. The top

section of Table 1.B shows OTA estimated that 6.94 percent of $44,322 million in FDI

benefits would to be included in AGI and taxed at an average marginal tax rate of 19.05

percent, resulting in estimated tax liability of $586 million. The bottom section of the table

shows that, based on calendar year 1996 tax return and benefits data, 6.99 percent of $44,105

million in FDI benefits were included in AGI and taxed at an average marginal tax rate of

20.75 percent, resulting in actual tax liability of $640 million.

SSEBA recipients have, on average, incomes that are slightly lower than FOASI

beneficiaries but higher than FDI recipients. The top section of Table 1.B shows OTA

estimated that 8.73 percent of $5,017 million in SSEBA benefits would be included in AGI

and taxed at an average marginal tax rate 19.86 percent, resulting in estimated tax liability

of $87 million. The bottom section of the table shows that, based on calendar year 1995 tax

return and benefits data, 9.51 percent of $5,017 million in SSEBA benefits were included in

AGI and taxed at an average marginal tax rate of 23.05 percent, resulting in actual tax

liability of $110 million.
12

TABLE 1.C

Comparison of Parameters Used to Estimate Tax Liability

Attributable to the Partial Inclusion of Benefits in AGI

with Parameters Calculated from Actual Amounts 1/

Calendar Year 1996

Benefit Source

Total

Benefits

Paid

($millions)

Benefits

Included

In AGI

 (percent)

Tax Rate on

Benefits

Included

in AGI

(percent)

Tax

Liability

($millions)

Estimate Parameters 2/

Federal Old-Age and Survivors Insurance 302,533 14.99 22.28 10,106

Federal Disability Insurance 44,322 6.94 19.05 586

Railroad Social Security Equivalent Benefits 5,017 8.73 19.86 87

 Total 351,872 13.89 22.05 10,799

Actual Parameters 3/

Federal Old-Age and Survivors Insurance 301,319 16.25 24.37 11,931

Federal Disability Insurance 44,105 6.99 20.75 640

Railroad Social Security Equivalent Benefits 5,017 9.51 23.05 110

 Total 350,441 14.99 24.15 12,681

Department of the Treasury

 Office of Tax Analysis

1/ Estimated tax liabilities were updated on a semi-annual basis. The table compares the parameters used in the

final estimates of tax liability with the parameters derived from actual tax return and benefits data. Rounding of

results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the benefits

paid figures.

2/ Source: The total benefits paid data are estimates provided by the Social Security Administration and the

Railroad Retirement Board; the other data come from the Office of Tax Analysis Individual Tax Model.

3/ Source: Total benefits paid data are derived from the 1998 Annual Statistical Supplement to the Social Security

Bulletin (Tables 4.A1 and 4.A2), the Social Security Administration and the Railroad Retirement Board; the tax

liability data are from the Internal Revenue Service's Individual Master File.
13

CHAPTER 3: METHODOLOGY, ESTIMATED TRANSFERS, AND

ADJUSTMENTS TO ESTIMATED TRANSFERS FOR

CALENDAR YEARS 1994, 1995, AND 1996 LIABILITY

I. Methodology for Estimated Transfers

Based on the estimates of annual liability given in chapter 2, the Department of the

Treasury’s Office of Tax Analysis constructed estimates of the annual and quarterly transfers

from the general fund to the FOASI, FDI, FHI, and SSEBA trust funds. In order to estimate

trust fund specific transfers, OTA first estimated the annual liability attributable to the

inclusion of FOASI, FDI, and SSEBA benefits in AGI on both a pre-OBRA 93 and a postOBRA 93 basis. The amount of liability transferable to the FHI trust fund was taken as the

difference between the post-OBRA 93 total liability estimate and the pre-OBRA 93 total

liability estimate. The amounts of liability transferable to the FOASI, FDI, and SSEBA trust

funds were the pre-OBRA 93 liability estimates. OTA then estimated the quarterly transfer

amounts associated with the current and subsequent calendar years. Separate methodologies

were used for the pre-OBRA 93 and post-OBRA 93 quarterly transfer estimates due to

differences in statutory requirements.

With respect to pre-OBRA 1993 transfers, statutory requirements dictate that liability

should be transferred quarterly as it accrues. Thereby, the quarterly transfers were made on

the first day of the calendar quarters beginning with the months of January, April, July, and

October. For a given liability year, the total amounts transferable to the FOASI, FDI, or

SSEBA trust funds were the amounts of liability estimated from the most recent forecast of

estimated annual liability,9 less any amounts of liability already transferred for that year. 

This net difference was then divided evenly over the remaining quarters still available for

transfers.

With respect to the post-OBRA 1993 transfers, statutory requirements dictate that

liability should be transferred quarterly as it is collected. Thereby, OTA estimated that

calendar year liability would be transferred in five installments, which represented four

quarterly estimated payments and one final payment of liability. Transfers to the FHI trust

fund were made on the fifteenth day of the quarter beginning with the months April, June,

September, and January. Thereby, the total April 15th transfer to the FHI trust fund always

contains two installments – one estimated payment for the current year’s liability and one

final payment for the prior year’s liability. For a given liability year, the total amount

transferable to the FHI trust fund was the amount of liability estimated from the most recent

forecast of estimated annual liability, less any amounts of liability already transferred for that

year. This net difference was divided evenly over the remaining installment periods still

available for transfers. The estimated installments for each liability year were then summed

for each quarter (to account for the April 15th transfer) in order to provide the final estimate

of quarterly transfers.
14

II. Methodology for Making Adjustments to Estimated Transfers

The Social Security Amendments of 1983 require adjustments to the trust funds if

actual tax return data subsequently reveal that the initial transfers were incorrect. To

calculate the actual additional tax liability for calendar years 1994, 1995, or 1996 resulting

from partial taxation of Social Security and Railroad Retirement Social Security Equivalent

benefits, the IRS created data files for each year based on Form 1040 records. All filers who

reported taxable Social Security or Railroad Retirement Social Security Equivalent benefits

on their Form 1040 in 1994, 1995, or 1996 were included in these data files. Although the

Form 1040 provides information on the total amount of benefits includable in taxable

income, it does not indicate whether the filer received FOASI, FDI, or SSEBA benefits. 

Such information is needed to allocate revenues accurately to the trust funds. To obtain this

information, the Form 1040 records belonging to those beneficiaries who reported taxable

benefits were matched to the Form 1099 records provided by the Social Security

Administration and the Railroad Retirement Board. (The actual Forms SSA-1099 sent to

taxpayers do not disclose whether the amounts shown are for retirement or disability

benefits; however, the Form SSA-1099 records provided by the Social Security

Administration to the IRS do include the source of benefits.)

Using this matched file of Form 1040 and Form SSA-1099 and RRB-1099 records,

the IRS calculated, for each benefit type: (1) the number of tax returns with benefits that were

includable in AGI, (2) the gross dollar amount of benefits paid to beneficiaries who filed tax

returns and had benefits included in AGI, and (3) the amount of taxable benefits. Next, for

each taxpayer on the file, taxable income and tax liability were computed with and without

taxable benefits. The amount of revenue attributable to the taxation of benefits was

calculated as the difference in actual tax liabilities and tax liabilities estimated with taxable

benefits excluded from taxable income. This calculation was made for both pre-OBRA 93

liability and post-OBRA 93 liability.

After comparing the IRS liability calculations with the OTA liability estimates, OTA

calculated adjustments to the estimated transfers. The adjustments were made in the first

possible quarterly transfer after receiving the IRS calculations. The adjustments were added

to the estimated transfer amounts, with the net transfer for the quarter reflecting the quarterly

estimated transfer for the current period liability and the adjustment to the estimate of prior

period liability.

III. Estimated Transfers and Adjustments to Estimated Transfers for Calendar

Year 1994 Liability

Estimated calendar year 1994 tax liability attributable to the taxation of benefits was

transferred quarterly to the FOASI, FDI, and SSEBA trust funds between January 1st and

October 1st, 1994. Total transfers of $5,729 million, $301 million, and $52 million were

made to the FOASI, FDI, and SSEBA trust funds, respectively. For the FHI trust fund,

estimated calendar year 1994 tax liability attributable to the additional taxation of benefits

was transferred quarterly between April 15th, 1994 and April 15th, 1995. Total transfers of
15

$3,897 million were made to the FHI trust fund.

Table 2 provides a summary of the amounts transferred based on OTA estimates, the

amounts based on IRS calculations, and the resulting adjustments to the FOASI, FDI, FHI,

and SSEBA trust funds due to the reconciliation of OTA estimates and IRS calculations. As

a result of the reconciliation of estimated and actual 1994 tax liability, a total net negative

adjustment of $893 million was made to the trust funds. That is, net excess estimated funds

were transferred from the trust funds back to the general fund. Thereby, the July 1, 1997

transfer included adjustments to the FOASI, FDI, and SSEBA trust funds of -$334 million,

$3 million, and -$4 million, respectively. The September 15, 1997 transfer to the FHI trust

fund included an adjustment of -$558 million.

IV. Estimated Transfers and Adjustments to Estimated Transfers for Calendar

Year 1995 Liability

Estimated calendar year 1995 tax liability attributable to the taxation of benefits was

transferred quarterly to the FOASI, FDI, and SSEBA trust funds between January 1st and

October 1st, 1995. Total transfers of $5,929 million, $333 million, and $50 million were

made to the FOASI, FDI, and SSEBA trust funds, respectively. For the FHI trust fund,

estimated calendar year 1995 tax liability attributable to the additional taxation of benefits

was transferred quarterly between April 15th, 1995 and April 15th, 1996. Total transfers of

$3,961 million were made to the FHI trust fund.

Table 2 provides a summary of the amounts transferred based on OTA estimates, the

amounts based on IRS calculations, and the resulting adjustments to the FOASI, FDI, FHI,

and SSEBA trust funds due to the reconciliation of OTA estimates and IRS calculations. As

a result of the reconciliation of estimated and actual 1995 tax liability, a total net positive

adjustment of $578 million was made to the trust funds. Thereby, the January 1st, 1999

transfer included adjustments to the FOASI, FDI, and SSEBA trust funds of $460 million,

$32 million, and $9 million, respectively. The January 15th, 1999 transfer to the FHI trust

fund included an adjustment of $77 million.

V. Estimated Transfers and Adjustments to Estimated Transfers for Calendar

Year 1996 Liability

Estimated calendar year 1996 tax liability attributable to the taxation of benefits was

transferred quarterly to the FOASI, FDI, and SSEBA trust funds between January 1st and

October 1st, 1996. Total transfers of $6,279 million, $364 million, and $57 million were

made to the FOASI, FDI, and SSEBA trust funds, respectively. For the FHI trust fund,

estimated calendar year 1996 tax liability attributable to the additional taxation of benefits

was transferred quarterly between April 15th, 1995 and April 15th, 1996. Total transfers of

$4,079 million were made to the FHI trust fund.
16

Table 2 provides a summary of the amounts transferred based on OTA estimates, the

amounts based on IRS calculations, and the resulting adjustments to the FOASI, FDI, FHI,

and SSEBA trust funds due to the reconciliation of OTA estimates and IRS calculations. As

a result of the reconciliation of estimated and actual 1996 tax liability, a total net positive

adjustment of $1,902 million was made to the trust funds. Thereby, the October 1st, 1999

transfer included adjustments to the FOASI, FDI, and SSEBA trust funds of $1,083 million,

$51 million, and $18 million, respectively. The January 15th, 2000 transfer to the FHI trust

fund included an adjustment of $750 million.
17

Table 2

Comparison of OTA Estimated Transfers, IRS Calculated Transfers, and

Corresponding Adjustments for

Calendar Years 1994 – 1996

($’s Millions)

Trust Fund

OTA

Estimated

Transfers

IRS

Calculated

Transfers Adjustment

CY 1994 Liability

FOASI 5,729 5,395 -334

FDI 301 304 3

FHI 3,897 3,339 -558

SSEBA 52 48 -4

 Total 9,979 9,086 -893

CY 1995 Liability

FOASI 5,929 6,389 460

FDI 333 365 32

FHI 3,961 4,068 77

SSEBA 50 59 9

 Total 10,273 10,852 578

CY 1996 Liability

FOASI 6,279 7,362 1,083

FDI 364 415 51

FHI 4,079 4,829 750

SSEBA 57 75 18

 Total 10,779 12,681 1,902

Department of the Treasury

Office of Tax Analysis
18

CHAPTER 4: FORECAST OF TRANSFERS TO TRUST FUNDS

FOR CALENDAR YEARS 1997 TO 2001

I. Forecasting Methodology

The Social Security Amendments of 1983 require that the annual report include a

forecast of transfers to the trust funds for the next five years. The forecast for the 1997

through 2001 period was produced using results from two versions of the ITM. The 1997

and 1998 forecasts were produced using results from the 1989-based ITM. The 1999 through

2001 forecasts were produced using results from the 1995-based ITM. For each version,

cross-sectional records on the ITM were extrapolated to future years. Computations based

on the ITM were weighted to produce results that are representative of the entire population

of taxpayers. Final estimates were produced by supplementing results from the ITM with a

spreadsheet model, as described in Chapter 2.

As noted in Chapter 2, tax returns alone do not provide sufficient data to estimate the

revenue effects of the partial inclusion of Social Security and Railroad Retirement Social

Security Equivalent benefits in AGI. The ITM was modified to include the total amount of

Social Security and Railroad Retirement Social Security Equivalent benefits paid, which

were provided by the Social Security Administration and the Railroad Retirement Board,

respectively. These amounts were distributed among appropriate recipients on the ITM by

using a sample of SSA-1099 and RRB-1099 information returns that were matched to the tax

returns in the SOI file, and the most recent Current Population Survey data from the Census

Bureau was used as a guide to the non-filing population. 

The Social Security Administration and the Railroad Retirement Board also provided

forecasts of the total amounts of benefits expected to be paid in future years. The percent of

aggregate retirement benefits includable in AGI and marginal tax rates were obtained by

extrapolating the ITM in accordance with the Administration's macro-economic forecasts.

In addition, the forecast of future transfers reflects the information obtained from the IRS

computation of marginal tax rates and benefits includable in AGI reported on tax returns for

calendar year 1996.

II. Forecast of Annual Transfers to the Trust Funds

The estimated transfers for calendar years 1997 through 2001 are presented in Table

3. The estimated transfers for 1997 through 1999 have been completed and include adjusting

transfers attributable to prior years’ liabilities. The transfers made for calendar year 1997

include adjustments due to the reconciliation of calendar year 1994 estimated and actual

liabilities. The FHI transfer for calendar year 1998 includes an adjustment due to the

reconciliation of calendar year 1995 estimated and actual liability. The FOASI, FDI, and

SSEBA transfers made for calendar year 1999 include adjustments due to the reconciliation

of calendar years 1995 and 1996 estimated and actual liabilities. The FHI transfer for

calendar year 1999 includes an adjustment due to the reconciliation of calendar year 1996

estimated and actual liability. For calendar years 1997 through 2001, OTA forecasts that
19

$46,959 million, $2,879 million, $31,341 million, and $412 million will be transferred from

general revenues to the FOASI, FDI, FHI, and SSEBA trust funds, respectively, for net

income tax liability attributable to the partial inclusion of Social Security and Railroad Social

Security Equivalent benefits in AGI.
20

Table 3

Forecast of Transfers, Net of Adjustments,

to the FOASI, FDI, FHI, and SSEBA Trust Funds

for Calendar Years 1997 – 2001

($’s Millions)

Calendar Year Liability

Trust Fund Completed Transfers Estimated Transfers Totals

1997 1998 1999 2000 2001 1997-2001

FOASI

Estimated Transfer 7,561 9,003 9,219 9,686 10,281 45,750

Prior Year Adjustment -334 0 1,543 0 0 1,209

Net Transfer 7,227 9,003 10,762 9,686 10,281 46,959

FDI

Estimated Transfer 458 519 572 599 645 2,793

Prior Year Adjustment 3 0 83 0 0 86

Net Transfer 461 552 655 599 645 2,879

FHI

Estimated Transfer 4,856 5,990 6,314 6,683 7,169 31,012

Prior Year Adjustment -498 77 750 0 0 329

Net Transfer 4,298 6,067 7,064 6,683 7,169 31,341

SSEBA

Estimated Transfer 61 74 79 87 88 389

Prior Year Adjustment -4 0 27 0 0 23

Net Transfer 57 74 106 87 88 412

Totals

Estimated Transfer 12,936 15,586 16,184 17,055 18,183 79,944

Prior Year Adjustment -833 77 2,403 0 0 1,647

Net Transfer 12,103 15,663 18,587 17,055 18,183 81,591

Department of the Treasury

Office of Tax Analysis
21

CHAPTER 5: ANALYSIS OF TAXABLE SOCIAL SECURITY

BENEFITS IN CALENDAR YEARS 1992 -1997

I. Distribution of Taxable Social Security Benefits by Family Economic

Income Class for Calendar Years 1994 through 1996

This section presents a distributional analysis of taxable Social Security and Railroad

Retirement SSEBA Tier 1 benefits. The tabulations are based on the 1989-based Individual

Tax Model (ITM) and are for calendar years 1994-1996. The ITM uses information provided

by the Social Security Administration and the Railroad Retirement Board on benefits paid,

as well as data from the Current Population Survey and other sources (see Chapter 2).10

These data were statistically matched to create a file that represents both beneficiaries with

taxable benefits and the recipient population that (1) is not required to file tax returns or (2)

files tax returns but has insufficient income to require the inclusion of benefits in AGI. 

The matched file can be used to create families by grouping related taxpayers. Income

received by families that may not be recorded on tax returns, such as means-tested transfer

payments and employer-provided fringe benefits, can also be computed using the matched

file. The total income of families computed on the ITM, "Family Economic Income," is used

to classify families in distributional tables by their economic well-being.11

Tables 5.A, 5.B, and 5.C summarize the benefit inclusion rates and average marginal tax

rates on benefits for families with taxable benefits for tax years 1994, 1995, and 1996,

respectively. The tables reflect the distribution of taxable benefits on a post-OBRA 1993

basis. Table 5.A shows that, on average, families with taxable benefits in 1994 included 41

percent of their benefits in AGI. The overall average marginal tax rate on taxable benefits

was 23 percent. Tables 5.B and 5.C show that the corresponding benefit inclusion rates for

tax years 1995 and 1996 are 42 percent and 41 percent, respectively. The overall average

marginal tax rates on taxable benefits for tax years 1995 and 1996 were 24 percent and 25

percent, respectively.

II. Comparison of Income Sources for Tax Years 1992 through 1997

Table 6 shows the sources of income for taxpayers with taxable Social Security

income in tax years 1992 through 1997 as a percent of AGI.12 Several interesting patterns

emerge. First, taxpayers with taxable Social Security benefits in 1992 through 1994 had

similar income profiles. The two largest income sources combined---taxable pension income

and wages---averaged about 43.6 percent of AGI in these years. Beginning in 1995,

however, the year-over-year population profile changed dramatically. The amount of AGI

attributable to labor income fell steadily, representing 39 percent of AGI in 1997. In

addition, there was a switch in the relative importance of interest income (both taxable and

tax-exempt) and equity income (dividends and capital gains) over the 1992 through 1997

period. In 1992, interest income for taxpayers with taxable Social Security benefits totaled

$82.1 billion, an amount equivalent to 25 percent of AGI. Equity income was $66.5 billion,
22

or 20.3 percent of AGI. By 1997, interest income for taxpayers with taxable benefits had

grown to $99.5 billion, a 21 percent increase relative to 1992 levels, but fell to 16.8 percent

of AGI. Conversely, equity income rose to $150.7 billion, a 126.4 percent increase over 1992

levels, and represented 25.4 percent of AGI in 1997. 

For the 1992 to 1995 period, nearly all of the change in the relative amounts of debt

and equity income included in modified AGI occurred from taxable interest income and

capital gains, rather than from tax-exempt interest and dividends. In particular, there was a

sharp decline in the level of taxable interest income in 1993 and 1994, with steady growth

thereafter. In contrast, tax-exempt interest grew slowly over the entire period. However, this

growth was outpaced by growth in other components of income. By the end of 1995, taxable

interest income, tax-exempt interest income, and AGI had grown 3.3 percent, 5.4 percent and

29.4 percent respectively, relative to their 1992 levels.

While the growth of interest income was stronger in 1996 and 1997, this growth

remained slower than other components of AGI. In particular, the growth of tax-exempt

interest income has lagged far behind other components of AGI during this period. By the

end of 1997, taxable interest income, tax-exempt interest income and AGI had grown 23

percent, 3.6 percent and 38.8 percent respectively, relative to their 1995 levels.

The rise in equity income from 1992 to 1997 was driven by a sizeable increase in net

positive capital gains realizations in AGI for taxpayers with taxable Social Security benefits.

From 1992 to 1997, net positive capital gains in AGI increased from $126.7 billion to $360

billion for the total taxpaying population, an increase of 186 percent. The growth in net

positive capital gains realizations was even greater for the subset of taxpayers with taxable

Social Security benefits. Net positive realizations for these taxpayers rose from $32 billion

in 1992 to $96.8 billion in 1997, an increase of 302 percent. In contrast, dividends earned

by taxpayers with taxable Social Security benefits (the other component of equity income)

grew by 156 percent, or approximately half the capital gains rate, over the same time period.

 It is interesting to note that the growth in capital gains realizations far outpaced growth in

asset prices during this period. For example, from the end of 1992 to the end of 1997, the

S&P 500 index grew from 415.7 to 872.7, an increase of approximately 110 percent.

III. The Effect of OBRA 1993 on Taxable Social Security Benefits for 1993

through 1996

Based on the matched Form 1040 and Form 1099 data described in Chapter 3, it is

estimated that the amount of benefits in AGI grew by about 116 percent over the 1993 to

1996 period ($24,650 million to $53,203 million). Tax liability attributable to the inclusion

of Social Security benefits in AGI grew at a slightly faster rate---nearly 128 percent ($5,558

million to $12,681 million).

The rapid growth in the amount of included benefits and the resulting tax liability is,

in large part, attributable to OBRA 1993, which simultaneously increased the amount of
23

benefits included in AGI and increased marginal tax rates for high-income taxpayers. As

explained in chapter 1, high-income taxpayers were required to include up to an additional

35 percent of benefits in AGI beginning in 1994. In addition, the passage of OBRA 1993

added two new statutory tax rates for high-income taxpayers. For tax year 1993, a 36 percent

marginal rate applied to taxable income in excess of $140,000 for joint returns and surviving

spouses, $127,500 for heads of households, $115,000 for single individuals, and $70,000 for

married individuals filing separately. A 39.6 percent marginal rate applied to taxable income

in excess of $250,000 ($125,000 for married individuals filing separately). 

The alternative minimum tax (AMT) calculation also was altered in OBRA 1993 for

tax year 1993 and beyond. The tentative minimum tax changed from a top marginal rate of

24 percent to 26 percent of the first $175,000 ($87,500 for married individuals filing

separately) of alternative minimum taxable income in excess of the applicable exemption

amount, and 28 percent of any additional alternative minimum taxable income. However,

the amount of alternative minimum taxable income exempt from the alternative minimum

tax was raised from $40,000 to $45,000 for married taxpayers filing jointly and for surviving

spouses. The exempt amount for single individuals and heads of households was raised from

$30,000 to $33,750.

Table 6 shows the rapid growth of included taxable benefits. For tax years 1992 and

1993, taxable benefits averaged approximately 7.2 percent of AGI, with average growth of

approximately 7.5 percent over the previous year.13 For tax year 1994, the first year of the

higher inclusion rates, taxable benefits were approximately 10.5 percent of AGI, growing

approximately 57 percent over the previous year. For tax years 1995 through 1997, taxable

benefits averaged approximately 10.5 percent of AGI and grew at an average rate of 16.7

percent.

Using the SOI data, we estimate that, for tax year 1994, the OBRA 1993 changes

affected about 226,900 returns with taxable Social Security benefits and generated

approximately $96 million in additional tax revenue from Social Security benefits. For tax

years 1995 and 1996, we estimate that the tax rate changes affected about approximately

253,600 and 295,800 returns, and generated about $123 million and $138 million in

additional tax revenue from Social Security benefits, respectively.
24

TABLE 5.A

Distribution of Taxable Social Security and Railroad Retirement Benefits

and Tax Liability Due to Taxable Benefits in Calendar Year 1994

By Family Economic Income Class 1/

Family Economic

Income

($ thousands)

Families 2/

(000)

Total

Benefits Amount

($ millions)

Amount of

Benefits

Included in AGI

($ millions)

Benefit Inclusion

Rate in AGI

(percent)

Tax Liability 

to Inclusion 

Benefits in A

($ millio

under 20 33 243 87 0.36 

20-30 151 1,338 383 0.29 30-50 1,139 10,910 2,805 0.26 550-75 2,068 23,854 8,028 0.34 1,5

75-100 1,428 18,980 8,127 0.43 1,7

100-200 1,760 25,012 11,820 0.47 2,9

> 200 814 15,232 7,549 0.50 2,3

Total 7,393 95,569 38,799 0.41 9,0

Department of the Treasury Office of Tax Analysis1/ Family Economic Income (FEI) is calculated as AGI plus: IRA and Keogh deductions; nontaxable transfer payments, such as SAid to Families with Dependent Children; employer-provided fringe benefits; inside build-up on pensions, IRAs, Keoghs, and interest; and imputed rent on owner-occupied housing. Capital gains are computed on an accrual basis, adjusted for inflation to the  Inflationary losses of lenders and of borrowers are subtracted and added to economic income, respectively. There is also an depreciation of non-corporate businesses. FEI is shown on a family rather than on a tax return basis. The economic incomes of aare added to arrive at the family's economic income used in the distributions.2/ About 33,000 families have FEI of $20,000 or less but pay tax on their Social Security benefits. A small number of these recipients who do not file jointly; these taxpayers face zero provisional income thresholds and automatically include 50 percent of majority of these families, however, have lower FEI than AGI largely because their accrued capital gains, adjusted for inflation(nominal) capital gains.
25

TABLE 5.B

Distribution of Taxable Social Security and Railroad Retirement Benefits

and Tax Liability Due to Taxable Benefits in Calendar Year 1995

By Family Economic Income Class 1/

Family Economic

Income

($ thousands)

Families 2/

(000)

Total Benefits

Amount

($ millions)

Amount of

Benefits

Included in AGI

($ millions)

Benefit Inclusion

Rate in AGI

(percent)

Tax Liability 

to Inclusion 

Benefits in A

($ millio

under 20 43 339 119 0.35 

20-30 156 1,396 406 0.29 30-50 1,242 11,982 3,324 0.28 650-75 2,192 25,752 9,014 0.35 1,7

75-100 1,588 21,772 9,525 0.44 1,9

100-200 2,004 29,628 14,143 0.48 3,5

> 200 942 18,517 9,179 0.50 2,8

Total 8,167 109,386 45,710 0.42 10,8

Department of the Treasury Office of Tax Analysis1/ Family Economic Income (FEI) is calculated as AGI plus: IRA and Keogh deductions; nontaxable transfer payments, such as SAid to Families with Dependent Children; employer-provided fringe benefits; inside build-up on pensions, IRAs, Keoghs, and interest; and imputed rent on owner-occupied housing. Capital gains are computed on an accrual basis, adjusted for inflation to the  Inflationary losses of lenders and of borrowers are subtracted and added to economic income, respectively. There is also an depreciation of non-corporate businesses. FEI is shown on a family rather than on a tax return basis. The economic incomes of aare added to arrive at the family's economic income used in the distributions.2/ About 43,000 families have FEI of $20,000 or less but pay tax on their Social Security benefits. A small number of these recipients who do not file jointly; these taxpayers face zero provisional income thresholds and automatically include 50 percent of majority of these families, however, have lower FEI than AGI largely because their accrued capital gains, adjusted for inflation(nominal) capital gains.
26

TABLE 5.C

Distribution of Taxable Social Security and Railroad Retirement Benefits

and Tax Liability Due to Taxable Benefits in Calendar Year 1996

By Family Economic Income Class 1/

Family Economic

Income

($ thousands)

Families 2/

(000)

Total Benefits

Amount

($ millions)

Amount of

Benefits Included

in AGI

($ millions)

Benefit Inclusion

Rate in AGI

(percent)

Tax Liability 

to Inclusion 

Benefits in A

($ millio

under 20 71 600 186 0.31 

20-30 188 1,712 551 0.32 30-50 1,309 13,129 3,718 0.28 750-75 2,295 27,816 9,726 0.35 1,8

75-100 1,712 23,982 9,561 0.40 2,

100-200 2,263 35,084 16,827 0.48 4,2

> 200 1,058 21,820 10,817 0.50 3,4

Total 8,896 124,143 51,386 0.41 12,6

Department of the Treasury Office of Tax Analysis1/ Family Economic Income (FEI) is calculated as AGI plus: IRA and Keogh deductions; nontaxable transfer payments, such as SAid to Families with Dependent Children; employer-provided fringe benefits; inside build-up on pensions, IRAs, Keoghs, and interest; and imputed rent on owner-occupied housing. Capital gains are computed on an accrual basis, adjusted for inflation to the  Inflationary losses of lenders and of borrowers are subtracted and added to economic income, respectively. There is also an depreciation of non-corporate businesses. FEI is shown on a family rather than on a tax return basis. The economic incomes of aare added to arrive at the family's economic income used in the distributions.2/ About 71,000 families have FEI of $20,000 or less but pay tax on their Social Security benefits. A small number of these recipients who do not file jointly; these taxpayers face zero provisional income thresholds and automatically include 50 percent of majority of these families, however, have lower FEI than AGI largely because their accrued capital gains, adjusted for inflation(nominal) capital gains.
27

TABLE 6

Income Sources of Beneficiaries With Taxable Benefits 1/

Tax Years 1992-1997

Returns with

Taxable Benefits in

1992

Returns with

Taxable Benefits in

1993

Returns with

Taxable Benefits in

1994

Returns with

Taxable Benefits in

1995

Returns with

Taxable Benefits 

1996

Amount Percent Amount Percent Amount Percent Amount Percent Amount Perc

AGI 328,421 339,881 368,260 425,862 505,054 Sources of AGIPensions 71,502 21.8 75,755 22.3 82,426 22.4 94,307 22.1 107,386 2Wages & Salaries 70,562 21.5 73,766 21.7 77,668 21.1 84,894 19.9 96,615 1Interest 54,912 16.7 44,544 13.1 42,796 11.6 56,708 13.3 64,799 1Dividends 34,393 10.5 35,817 10.5 36,261 9.8 41,669 9.8 46,624 Net Capital Gains 32,048 9.8 40,908 12.0 39,089 10.6 46,776 11.0 69,030 1Income Sources not in AGISocial Security inmodified AGI 2/

23,140 7.0 24,650 7.3 38,737 10.5 45,620 10.7 53,203 1

Tax-ExemptInterest

27,197 8.3 28,009 8.2 28,701 7.8 28,675 6.7 28,915 

 Department of the Treasury Office of Tax Analysis 1/ Income sources total differs from AGI by the amount of adjustments to income, such as the deduction for one-half of 

and by other income sources, such as partnership and other Schedule E income.

 2/ Includes additional taxable benefits due to OBRA 93.
28

BIBLIOGRAPHY

Cilke, James C. "The Treasury Individual Income Tax Simulation Model." mimeo. 

Department of the Treasury. Office of Tax Analysis. April 1994.

Cronin, Julie-Ann. U.S. Treasury Distributional Analysis Methodology. OTA Working

Paper 85. Department of the Treasury. Office of Tax Analysis. September 1999.

Economic Report of the President. Washington, D.C.: Government Printing Office. 

February 1997.

U.S. Department of Health and Human Services. Social Security Administration. 1996

Annual Statistical Supplement to the Social Security Bulletin. Washington, D.C.:

 Government Printing Office, September 1996.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1984. March 1987.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1985. August 1987.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1986. February 1989.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Years 1987 and 1988. March

1991.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1989. March 1992.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1990. January 1993.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1991. September 1994.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1992. January 1997.

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social

Security and Railroad Retirement Benefits in Calendar Year 1993. July 1998.

 
29

 

ENDNOTES

1 This submission consolidates the annual reports for tax liability years 1994 through 1996 and

makes them current with the status of the reconciliation of estimated transfers and correcting

adjustments. Prior reports were delayed due to the discovery of a computer programming

error affecting the calculation of tax liability associated with Railroad Retirement Tier II

benefits over the 1988 through 1994 period. There is no statutory requirement to report on

the transfer of tax liability attributable to Railroad Retirement Tier II benefits, however, the

reconciliation process was delayed while calculations related to the taxation of all benefits

data were verified. While no other errors were discovered, the systems verification delayed

the production of the reports for tax years 1992 and 1993.

2. For single filers, $4,500 represents one-half of the difference in the first and second

provisional income thresholds ($25,000 and $34,000). For joint filers, $6,000 represents

one-half of the difference in the first and second provisional income thresholds ($32,000 and

$44,000).

3 A full description of OTA’s methodology is given in Chapter 2.

4. A detailed description of the Individual Income Tax Model can be found in Cilke (1994).

5. OTA does not estimate the liability attributable to the receipt of FOASI and FDI benefits by

non-resident aliens. Prior to tax year 1995, one-half of any Social Security benefit received

by a non-resident alien was subject to a 30 percent tax rate, and this amount was

automatically withheld by the Social Security Administration. According to P.L. 103-465,

85 percent of any Social Security benefit received by a non-resident alien is subject to a 30

percent tax rate for tax year 1995 and after. 

Each month, the Social Security Administration sends a certification of the amount withheld

to the Treasury Department's Financial Management Services, and the transfer of the

withheld amount from the FOASI and FDI trust funds to general revenues and back again to

the FOASI and FDI trust funds is made. Since the Social Security Administration has

information on the actual amounts withheld, OTA does not estimate these withheld amounts.

Similarly, the Railroad Retirement Board automatically withholds taxes on Railroad Social

Security Equivalent benefits received by non-resident aliens. However, a different procedure

is used to transfer these amounts to the SSEBA. OTA includes an estimate of the withheld

amounts in its initial estimates of transfers to the trust funds and subsequently verifies these

estimates with the Railroad Retirement Board.

The tables in the report do not include FOASI or FDI benefits received by non-resident aliens

or the taxes attributable to these benefits. However, the tables show the Railroad Social

Security Equivalent benefits received by non-resident aliens.

6. For tax years after 1997, the initial estimates of tax liability attributable to the inclusion of
30

 

benefits in AGI have been made using an ITM based on an SOI file for 1995.

7. These forecasts for FOASI and FDI do not include benefits received by non-resident aliens.

8 . These estimates were made semi-annually. For each forecasted year, a first estimate was

made in late December for the President’s budget. This estimate was updated in late June

for the Mid-Session review of the President’s budget.

9. Ten-year estimates for the Presidents budget are typically completed in December and then

revised in June for the Mid-Session review of the President’s budget.

10. The SOI sample excludes beneficiaries who live in institutions and who do not earn sufficient

income to file a return. The benefit figures from SSA and RRB are adjusted for these nonfilers.

11. See Cronin (1999) for a complete description of the U.S. Treasury distributional analysis

methodology.

12. The data in table 6 are from the 1992 through 1997 SOI files.

13. Social Security benefits in AGI were $21,359 million in calendar year 1991.

This study was prepared by David Richardson of the Office of Tax Analysis, under the direction of

Joel Platt.