President Donald Trump has recently proposed a bold plan to ban taxes on Social Security benefits, a move that has sparked significant debate. While the idea may sound appealing to retirees who rely on these benefits as a primary source of income, it raises questions about its long-term impact on the country’s fiscal health. Would eliminating taxes on Social Security benefits truly help retirees, or could it create unintended consequences for both individuals and the broader economy?
Trump campaigned to eliminate tax on Social Security
Throughout Trump’s presidential campaign, he consistently affirmed that he would eliminate all taxes on Social Security income. If he is successful, the new legislation would impact 67 million taxpayers who claim monthly retirement and disability program benefit checks. “Seniors should not pay taxes on Social Security,” Trump wrote on the social media platform Truth Social.
Currently, up to 85% of your Social Security income can be subjected to federal tax. While this pledge by Trump certainly helped to sway voters in his favor, it is not as clear cut as it seems. While it may seem like a massive relief to beneficiaries, there are also downsides to eliminating the taxes. In addition, it is important to remember that the people who benefit the most from eliminating the taxes comes down to the top earners.
Cutting taxes only benefits top earners
Households with the highest incomes, specifically those in the top 0.1% who are earning nearly $5 million or more annually, would stand to gain the most from the proposal to eliminate taxes on Social Security benefits. If the tax were removed, these high-income individuals could receive an average tax break of around $2,500 in 2025.
However, middle- and upper-middle-income households earning between $63,000 and $200,000, would also benefit, though to a lesser extent. These households could expect a tax reduction ranging from $1,190 to $1,430, providing a modest boost to their after-tax income. While these tax breaks may seem beneficial in the short term, the long term health of the Social Security fund realizes in its taxation.
Social Security longevity relies on its taxation
Social Security is projected to face insolvency by 2032, and repealing the tax on Social Security benefits could push this date forward by an additional year, according to the Committee for a Responsible Federal Budget. This move would likely result in fewer benefits for retirees in the future. If Social Security reaches insolvency under current laws, trustees estimate that beneficiaries will only be able to receive 83% of their scheduled benefits by 2035.
However, with the tax repeal, that share could shrink even further, down to just 73%. Trump’s plan to eliminate taxes on Social Security benefits would bring this timeline forward, potentially reaching insolvency by 2030. Additionally, cutting taxes on Social Security benefits would lead to a $1.8 trillion revenue shortfall between 2026 and 2035, as reported by the Social Security and Medicare Trustees. This would include a $1.05 trillion reduction in revenue for Social Security and a $750 billion loss for Medicare.
Eliminating taxes on Social Security benefits may seem appealing, especially for retirees looking to keep more of their income. However, in the long run, this could have serious consequences. It would accelerate the insolvency of the Social Security trust fund, possibly as early as 2030, depriving future retirees of critical benefits. With reduced revenues, Social Security would face significant deficits, creating a financial burden for the program.
The projected tax cut would also widen the gap between the wealthy and the rest of the population, benefiting high earners the most. Ultimately, while tax relief might offer short-term advantages, it could endanger the long-term stability and sustainability of vital retirement programs for future generations. These type of appeals cannot be taken lightly, and advice from financial experts must be considered.
