It’s an open secret in the financial planning industry that 401(k) plans and IRAs negatively impact Social Security income.
Basically, 1/2 of your SS benefits are added to the rest of your retirement plan income and the Social Security income is taxed at ordinary income tax rates. The exact percentage of Social Security that is subject to income taxes depends on your exact income.
Now… lots of people are starting to believe that they’ll never see a dime from Social Security, and… as much as I am a pessimist about government programs, I don’t think Social Security will ever go fully bankrupt. People want their money back and I think if you pressed them for a vote on it, even young people will want to get at least something back. And the government is very clever about how it pays for things, so it’s unlikely it will yank benefits away from people.
Besides, if politicians floated that one across voters, how would they get re-elected?
Likely what will happen is the government will cut back on benefit payments or extend the retirement age to 75 or 80. By the way, if you extend the retirement date far enough into the future, you could actually make the Social Security system solvent. Not that this is necessarily a good thing considering it means paying more taxes for longer period of time and also allows politicians to “borrow” even more money they don’t ever have to pay back, but… it’s an option the government could use to keep the payments flowing.
In any case, it seems weird to me to pay Social Security tax and then when you retire to pay another tax on that original tax. Compound taxation. Yuck.
Insurance avoids this problem entirely.