How Trump's Plan to End Taxes on Social Security Would Work

Ahead of November’s election, former President Donald Trump is asking for an end to the federal income taxes on Social Security advantages.

Trump posted a video to his social media platform Truth Social on Monday railing against the “cruel double taxation” of Social Security, referring to the payroll taxes that employees pay to fund this system after which the federal income taxes some owe on a portion of advantages once they’re received.

“I’m promising no tax on Social Security advantages,” Trump said within the clip, adding that the tax “only got here into existence in 1984” and is putting pressure especially on older adults who’re scuffling with inflation.

Trump voiced support of the policy earlier this summer, and it’s now becoming a cornerstone of his presidential re-election bid.

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‘No tax on Social Security’: What would occur?

Over 72 million Americans collect Social Security advantages every month. Most recipients — about 60% — already don’t pay taxes on their advantages, in keeping with the Social Security Administration.

Like Trump said, Social Security payments weren’t federally taxed until 1984, when the Reagan administration implemented rules that taxed as much as 50% of advantages if the recipient’s income exceeded certain thresholds. A decade later, the Clinton administration increased the portion of advantages that may very well be taxed to 85%, where the cap stands today.

As a singular policy shift, recent analyses show that ending taxes on Social Security would have mixed results.

On one hand, it could definitely put extra money within the pockets of the beneficiaries who’re subject to federal taxes on a part of their advantages. On the opposite, it could decrease tax revenues and put this system on a faster track toward insolvency.

More cash in people’s pockets

An evaluation by Morningstar found that, over the following few many years, the policy would help thousands and thousands of Americans fully fund their retirement. Without the Social Security tax change, the financial firm estimates that 45% of U.S. employees won’t find a way to cover their projected expenses in retirement. With the tax cut, that share of employees is reduced to 41%.

That is an improvement of 4 percentage points, “however it’s still a low percentage,” the Morningstar researchers wrote, noting that the proposal only “form of” gets on the broader issue of improving Social Security.

Overall, what they found is that the perks of cutting taxes on Social Security advantages disproportionately help affluent retirees.

“These gains simply mean retirees who we already project would meet their expenses in retirement could be higher off,” they said.

That’s largely because the present tax is just levied on beneficiaries who’ve incomes above certain thresholds (between $25,000 and $34,000 of combined income should you’re a single filer). Wealthy retirees who take distributions from various retirement plans like IRAs, 401(k)s and pensions would easily meet those income thresholds and subsequently profit from the tax break.

Nonetheless, some retirees who work to make ends meet may additionally exceed the income thresholds and stand to profit, as well. “Just a few extra thousand dollars a yr could make a meaningful difference” to people in those circumstances, the researchers said.

Draining Social Security coffers

The elephant within the room is that Social Security is already on flimsy financial footing. The trust funds that pay out this system’s advantages are projected to deplete by 2035.

This deadline is predicated on current tax policy. While this system’s funds weren’t the main target of Morningstar’s evaluation, the researchers noted that nixing taxes on advantages and losing the associated revenue would speed up Social Security’s insolvency timeline.

A separate evaluation by the right-leaning Center for a Responsible Federal Budget tackles this head on. It found that an end to taxes on Social Security would end in a $1.6 trillion reduction in tax revenues for the Social Security and Medicare programs. Because of this, each programs would run out of cash sooner: one yr sooner for the retirement advantages fund and five years sooner for the Medicare fund.

Because Social Security is funded by payroll taxes, insolvency wouldn’t mean this system would shut down. Nonetheless, on this scenario, there wouldn’t be enough people working to adequately fund full advantages every month. Checks may very well be cut by 20% or more.

For now, no less than, that seems unlikely. Congress still has a decade to fix Social Security’s financial problems.

One recent proposal by U.S. Rep. Angie Craig, D-Minn., goals to do each. Dubbed the “You Earned It, You Keep It Act,” Craig’s bill seeks to finish taxes on Social Security advantages while raising the income cap that shields high-income earners from paying into Social Security. Currently, earnings above $168,600 for 2024 aren’t subject to Social Security payroll taxes. She wants to extend that cap to $250,000. An evaluation of the proposal by the Social Security Administration determined that the changes would beat back the agency’s insolvency date by 20 years.

Craig frames the bill as a “win-win” that each cuts taxes on seniors and ensures full Social Security advantages pay out long into the long run. While there’s bipartisan appetite for ending taxes on Social Security, it’s not clear whether a proposal like Craig’s would pass Congress.

The bill was introduced within the U.S. House of Representatives in January and has not come to a vote.

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