Former President and 2024 Republican nominee Donald Trump has joined other politicians advocating for abolishing taxes on Social Security benefits. The idea may make a great political rallying cry, but it actually does not make good policy.
The idea undermines the financial integrity of both Social Security and Medicare and will, in fact, disproportionately benefit higher-income individuals, directly contravening the program’s current progressive structure.
Taxed Social Security Benefits
Current tax policy on Social Security benefits is designed to be progressive—ensuring those with higher incomes contribute more money.
Beneficiaries with incomes below $25,000 individually or $32,000 for couples are exempt entirely, while those with higher incomes can see up to 85% of their benefits taxed. The net result is that about half of Social Security recipients pay no taxes on their benefits whatsoever—while higher-income beneficiaries pay a fairer share.
As such, the removal of this tax provision would chiefly benefit higher-income individuals, shifting the burden onto low- and moderate-income beneficiaries through potential tax increases elsewhere, or benefit cuts.
The proceeds from taxing Social Security benefits play a crucial role in bolstering the financial stability of both the Social Security program and Medicare—with proceeds from taxed benefits credited to funds earmarked for both. The elimination of the tax would cost nearly $1 trillion over the next decade—a shortfall that will need to be made up somewhere.
From a policy perspective, Social Security is an earned benefit and should be taxed like one—akin to an employer pension plan. Maintaining this tax policy ensures fair and consistent treatment of retirement benefits, public and private.
Implications Of Reduced Revenues
Reducing or eliminating the taxation of Social Security benefits would necessitate either raising additional payroll taxes or implementing more significant benefit cuts to maintain the program’s solvency.
Social Security is already facing a long-term financial shortfall, and any reduction in revenue could exacerbate the situation, leading to hastened fund depletion and reduced benefit payouts. These changes would most deleteriously impact low- and moderate-income beneficiaries, increasing their financial insecurity in retirement.
Putting specific figures to the issue, according to an analysis by the Committee for a Responsible Federal Budget, the elimination of the tax on benefits would increase deficits by $1.6 trillion to $1.8 trillion through 2035. It would also advance the insolvency date of the Social Security retirement trust fund by more than a year, and Medicare’s trust fund by six years.
Room For Policy Changes
Social Security benefits were first subject to income tax in 1984, but the thresholds for exemption have gone unchanged. As such, the percentage of beneficiaries that are subject to taxation has increased from about 10% to about 50% the Social Security Administration notes.
A more nuanced policy approach to reforming the tax would be to revisit the $25,000 and $32,000 thresholds and adjust them from 1984 to 2024 dollars—about $77,000 and $99,000, respectively. Such adjustments would ensure the tax policy remains progressive and fair, as it was originally intended, while protecting the financial integrity of the Social Security program.
The proposal to eliminate income taxes on Social Security benefits, championed most recently by Trump, might initially appear to be a straightforward way to provide financial relief to retirees. However, such positions often conceal a much more complex policy reality.
While the idea of tax-free Social Security benefits is politically appealing, it would be a policy mistake, and threaten the stability of both Social Security and Medicare—the very services many individuals that may be motivated by the proposal rely on.
Simple adjustments to income thresholds to reflect current economic conditions and inflation could offer a more balanced solution, but might not be as pithy on a campaign sign or social media post.
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