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

Ahead of November's election, former President Donald Trump is calling for an end to the federal income taxes on Social Security benefits.

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 workers pay to fund the program and then the federal income taxes some owe on a portion of benefits once they are received.

“I’m promising no tax on Social Security benefits,” Trump said in the clip, adding that the tax “only came into existence in 1984” and is putting pressure especially on older adults who are struggling with inflation.

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

'No tax on Social Security': What would happen?

Over 72 million Americans collect Social Security benefits each month. Most recipients — about 60% — already do not pay taxes on their benefits, according to the Social Security Administration.

Like Trump said, Social Security payments were not federally taxed until 1984, when the Reagan administration implemented rules that taxed up to 50% of benefits if the recipient's income exceeded certain thresholds. A decade later, the Clinton administration increased the portion of benefits that could 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 certainly put more money in the pockets of the beneficiaries who are subject to federal taxes on part of their benefits. On the other, it could decrease tax revenues and put the program on a faster track toward insolvency.

More money in people’s pockets

An analysis by Morningstar found that, over the next few decades, the policy would help millions of Americans fully fund their retirement. Without the Social Security tax change, the financial firm estimates that 45% of U.S. workers won’t be able to cover their projected expenses in retirement. With the tax cut, that share of workers is reduced to 41%.

That's an improvement of 4 percentage points, “but it’s still a low percentage,” the Morningstar researchers wrote, noting that the proposal only “sort of” gets at the broader issue of improving Social Security.

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

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

That’s largely because the current tax is only levied on beneficiaries who have incomes above certain thresholds (between $25,000 and $34,000 of combined income if 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 therefore benefit from the tax break.

However, some retirees who work to make ends meet might also exceed the income thresholds and stand to benefit, as well. “A few extra thousand dollars a year could make a meaningful difference” to people in those circumstances, the researchers said.

Draining Social Security coffers

The elephant in the room is that Social Security is already on flimsy financial footing. The trust funds that pay out the program’s benefits are projected to deplete by 2035.

This deadline is based on current tax policy. While the program’s finances were not the focus of Morningstar’s analysis, the researchers noted that nixing taxes on benefits and losing the associated revenue would accelerate Social Security’s insolvency timeline.

A separate analysis 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 result in a $1.6 trillion reduction in tax revenues for the Social Security and Medicare programs. As a result, both programs would run out of money sooner: one year sooner for the retirement benefits fund and five years sooner for the Medicare fund.

Because Social Security is funded by payroll taxes, insolvency would not mean the program would shut down. However, in this scenario, there would not be enough people working to adequately fund full benefits each month. Checks could be cut by 20% or more.

For now, at least, 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., aims to do both. Dubbed the “You Earned It, You Keep It Act,” Craig’s bill seeks to end taxes on Social Security benefits while raising the income cap that shields high-income earners from paying into Social Security. Currently, earnings above $168,600 for 2024 are not subject to Social Security payroll taxes. She wants to increase that cap to $250,000. An analysis of the proposal by the Social Security Administration determined that the changes would push back the agency’s insolvency date by 20 years.

Craig frames the bill as a “win-win” that both cuts taxes on seniors and ensures full Social Security benefits pay out long into the future. 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 in the U.S. House of Representatives in January and has not come to a vote.

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