There has been a lot of political talk lately about no longer taxing Social Security payments. (Like they promised when it was created back in the Roosevelt administration.)
Former President Donald Trump, in a campaign promise, vowed to eliminate taxes on Social Security benefits. “Seniors should not pay taxes on Social Security,” Trump wrote on the social media platform Truth Social, which he also repeated several times during his campaign run.
Let's take a look at the pros and cons of eliminating the tax on Social Security income.
The pros of eliminating taxes on Social Security
Currently, up to 85% of your Social Security benefits can be subject to federal tax, depend on how much other taxable income you receive.
The Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution, researched who would benefit the most from untaxed Social Security income down to top earners, including:
- The highest-income households or folks on the top 0.1% of the income spectrum (those making nearly $5 million or more annually) would see the biggest benefit from untaxed Social Security income. Hypothetically, if there were no taxes on the benefit they’d get an average tax cut of nearly $2,500 in 2025.
- Middle- and upper-income households (those earning between $63,000 and $200,000) would also get a stroke of luck, as a share of after-tax income. Households in this income range would see a tax cut between $1,190 and $1,430.
The cons of eliminating taxes on Social Security
Eliminating taxes on Social Security income could have long-term implications that would hurt the program and the amount of cash you’re entitled to.
Let's examine those that wouldn't benefit or could be harmed:
- The lowest earners wouldn’t see a difference. Less than 1% of the lowest-income households-- those making about $33,000 or less -- wouldn’t see a tax cut at all (Because they currently are not paying any tax on their social security income). By comparison, about 28% of middle-income households would get a tax cut and about 20% of those on the top 0.1% of the income threshold would see a tax cut.
- Medicare could possibly become insolvent by 2030. The Social Security program is facing financing shortfalls, and under current law, its revenue is projected to run dry by 2036. Repealing the tax on social security would speed up the insolvency timeline by six years, according to estimates from the Committee for a Responsible Federal Budget.
The Urban Institute revealed that it could impact as many as 81 million retirees, people with disabilities, and their families who are expected to collect Social Security in 2035.
Let's break it down
At this time, Social Security beneficiaries with incomes over $34,000 ($44,000 for married couples), are taxed on an additional 35% of their benefits, with that revenue going to help support the Medicare HI trust fund. Without that source of revenue, and upon Medicare’s insolvency, beneficiaries couldn’t claim their full benefit amount.
- Social Security would become insolvent by 2032. Repealing the tax would move up the insolvency date of Social Security’s retirement trust fund one year earlier, according to the Committee for a Responsible Federal Budget.
- There would be fewer benefits in the long run. Under current law, Social Security trustees project that you’ll only be able to cash in 83% of your scheduled benefits in 2035 if the program reaches insolvency. That share would narrow even further to 73%. As mentioned, the plan to eliminate taxes on Social Security would advance that timeline to 2030.
- It would reduce revenues by $1.8 trillion through 2035. Slashing taxes on Social Security would cause a $1.8 trillion deficit between fiscal year 2026 and 2035, according to data from the Social Security and Medicare Trustees. This includes $1.05 trillion less in revenue for the Social Security program and $750 billion less for Medicare.
A separate analysis from the Congressional Budget Office expects a total reduction in revenue of $1.6 trillion, with $950 billion less for Social Security and a cut of $650 billion for Medicare.
Expect that Social Security benefits will be a hot topic
Of course, Trump isn’t the first person to suggest getting rid of taxes on Social Security benefits. While the former president is using the proposal as a bid for this campaign, others have floated similar ideas in the past. And it isn't up to the President, but Congress to make these decisions.
For instance, Minnesota Rep. Angie Craig (D-Minn.) proposed the You Earned It, You Keep It Act, which aims to eliminate taxes on Social Security income by raising the Social Security wage base. (Another way to say higher earners would foot the bill.)
Ending taxes on Social Security income could be an enticing idea, but it could have some major repercussions. One thing is for certain though: Congress will have to fix the Social Security program’s imminent funding shortfall within the next few years. It's time to stop kicking the can down the road.