President-elect Donald Trump is set to retake office in a little over a month after winning the election over Vice President Kamala Harris in November. Trump’s campaign made many promises, but one particularly interesting promise to retirees was his pledge to eliminate Social Security benefit taxes.
To be clear, these aren’t the same as the Social Security payroll taxes that workers pay, which serve as the program’s main source of funding. This is an additional tax that retirees pay if their incomes exceed certain thresholds.
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On the surface, Trump’s plan sounds like an unqualified positive for retirees, many of whom are struggling with a lack of savings and Social Security’s declining buying power. But there’s a hidden drawback to this strategy that could hurt seniors far more than it helps them over the long run.
What are Social Security benefit taxes?
Social Security benefit taxes didn’t always exist. They only took effect in 1984, with the government adding a second tier of benefit taxation 10 years later. Since then, the rules for benefit taxation have remained constant.
Retirees may owe taxes on a portion of their benefits based on their provisional income — their adjusted gross income (AGI) plus any nontaxable interest they’ve earned during the year and half of their annual Social Security benefit. The table below outlines how much of their annual benefit they could owe taxes on based on their provisional income and marital status:
|
Marital Status |
0% of Benefits Taxable if Provisional Income Is Under: |
Up to 50% of Benefits Taxable if Provisional Income Is Between: |
Up to 85% of Benefits Taxable if Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Source: Social Security Administration.
To be clear, this doesn’t mean you’ll lose up to 85% of your benefits to the government. It just means the government could tax up to 85% of your benefits at your ordinary income tax rate.
Still, this is a big problem for seniors, especially since the thresholds for benefit taxation haven’t changed in three decades. With average benefits rising over time, more retirees find themselves encountering these taxes every year.
It’s understandable why many would want to eliminate this tax. It would give seniors additional money to spend, which could help make up for the fact that Social Security has lost 20% of its buying power since 2010. However, it wouldn’t be long before this move could backfire in a big way.
What’s the problem with eliminating the income tax on Social Security benefits?
Eliminating the Social Security benefit tax would take away one of only three sources of funding for the program, the others being the Social Security payroll taxes that workers pay and the interest that the program’s trust funds earn.
Social Security could compensate for this for a little while by withdrawing more money from the trust funds to make up for what the payroll taxes aren’t covering. But this won’t be possible for long. As it is, even with Social Security benefit taxes in place, the program can only continue to pay out full benefits until about 2035. This is when its trust fund reserves are expected to be depleted. Retirees would face a 23% benefit cut unless the government takes steps to increase the program’s funding before then.
Eliminating the Social Security benefit tax would only accelerate this deadline. A 23% benefit cut would likely hurt these seniors worse than paying benefit taxes on a portion of what they receive each year.
The silver lining
Though Trump pledged to eliminate these income taxes on benefits, it’s not solely within his power as president to do so. Congress would have to pass a law eliminating this tax, and even with Republicans controlling the House and Senate, it could still be difficult to pull this off.
At a minimum, we can say it’s not going to happen immediately in 2025. Whether it happens in the future remains to be seen. If it does at all, it would likely come as a result of broader Social Security reforms designed to keep the program sustainable for generations to come.
