Hot on the heels of his proposal to axe tax on tips made by service workers, Donald Trump has proposed another tax cut: to end all taxes on Social Security retirement income.
“SENIORS SHOULD NOT PAY TAX ON SOCIAL SECURITY!” Trump wrote on July 31 on Truth Social, appealing to the tens of millions that receive monthly Social Security benefits ahead of the looming 2024 presidential election. Some 40 percent of benefit recipients currently pay federal income taxes on retirement, spousal and disability benefits—not including Supplemental Security Income (SSI).
Under current Internal Revenue Service (IRS) rules, individuals who have an income between $25,000 and $34,000 per year are subject to taxes on up to 50 percent of their Social Security income. If you earn more than this, as much as 85 percent of benefits provided by the Social Security Administration (SSA) could be taxed.
But experts have criticized Trump’s plans, from both a cost and political perspective, warning that it could further imperil the SSA’s imminent funding crisis as well as increasing the national deficit.
The Cost
Trump’s proposal to shield Social Security benefits from federal income taxes would increase deficits by $1.6 trillion to $1.8 trillion by 2035, according to analysis conducted by the Committee for a Responsible Federal Budget (CRFB).
Perhaps most importantly to the average U.S. worker who will collect Social Security in the future, the SSA’s 2023 Trustees Report released earlier this year said that trust funds that shore up the country’s largest benefit system for retirees, survivors and disabled people is due to run out of funds in 2035. By then, recipients are projected to receive only 83 percent of their full benefits unless action is taken by Congress to ensure its solvency.
As income tax revenue collected from Social Security benefits is allocated to the Social Security and Medicare trust funds, cutting it would naturally dampen the revenue taken to fund the SSA. The CRFB has calculated that exempting benefits from federal income taxes would advance the insolvency date of Social Security’s retirement trust fund by over one year. The Tax Foundation, which branded the policy as “fiscally irresponsible,” predicted it could deplete the funds two years earlier than currently projected—in 2033.
“The revenue from taxing these benefits is substantial—over $50 billion in 2023, representing just under 4 percent of the total Social Security income,” Devin Carroll, owner and lead advisor at Carroll Advisory Group, told Newsweek.
“This figure is expected to triple in the next decade as more retirees fall into taxable brackets,” he continued. According to a projection by the CRFB, this year, taxes on Social Security benefits are expected to raise about $94 billion.
Carroll said that removing a source of revenue from the SSA without a viable replacement would “exacerbate the already looming shortfall” faced by the government agency, and could potentially “lead to even more severe benefit cuts in the future.”
Newsweek contacted Trump’s campaign team for comment and clarification on how the tax cuts would be paid for.
The Impact
“Eliminating taxes on Social Security income would provide some financial relief to retirees, but the impact would be relatively modest,” Carrol said.
According to the Tax Foundation, eliminating these taxes would increase after-tax income by up to 1.1 percent for retirees with incomes above the tax thresholds, with an average increase of 0.6 percent. But retirees with less cash in their pockets—who are already exempt from benefit taxes—are unlikely to see much of a change.
“Removing taxes on Social Security income could offer relief to many retirees, potentially enhancing their quality of life and ability to access essential care and services,” Neal Shah, CEO of health-tech and elderly care startup CareYaya, told Newsweek. “This change would mainly benefit retirees and those approaching retirement age by increasing their income right away.”
But according to Carroll, the financial impact on current workers is less positive. “Current workers would not benefit directly from the tax elimination since they are not yet receiving Social Security benefits,” he explained. “However, they might perceive it as a future benefit which could sway opinions or votes. But overall, the proposal is more of a political maneuver than a substantial financial improvement for either group.”
The Politics
Victoria Haneman, professor of trusts and estates at Creighton University School of Law, told Newsweek that politicians who vow to cut taxes “without discussing the cost of the tax cut and who is going to bear the cost of the tax cut” are participating in “political theatre.”
“We tend to give media attention to any politician, regardless of political party, who utters the words ‘tax cut.’ Reducing the tax on senior citizens is always popular, in part because voter turnout is always highest among 65 to 74 year olds,” she said.
“Not to be cynical, but politicians know what they are doing when they discuss cutting taxes for people in the broadest voting demographic. It is political theater.”
Haneman argued that a “better option is for income thresholds on the taxation of Social Security to be adjusted for inflation,” but admitted this is not something that is likely to appeal to voters. “If political theater is what a politician wants, however, it is far more difficult to sell indexing for inflation as an important change.”
