Former U.S. President Donald Trump promised to eliminate or cut certain taxes, especially targeting the ones levied on Social Security benefits. Though the proposal is quite attractive to many voters, there are boundless questions about the future of Social Security and Medicare due to long-term viability. Understanding the tenets of the tax cuts will be important in putting them into context to ascertain how they might affect American households and the overall economy.
Eliminate taxes on Social Security Benefits
The Trump plan would eliminate the federal income tax on Social Security benefits, which currently taxes about 40% of beneficiaries. Current law starts taxing Social Security benefits for people with incomes over $25,000 (over $32,000 for couples) and may tax up to 85%. The purpose of this proposal is to provide financial relief to seniors who heavily rely on such benefits for their livelihood. However, experts warn that this could have disastrous effects on the program itself.
Doing away with this tax would cause Social Security to lose quite a bit of revenue. The estimates are that the repeal of the tax would put the program at a deficit of $950 billion over the course of a decade, which would advance its insolvency date from 2033 to 2034. What this means is that beneficiaries might experience a cut in their monthly allowances as early as 2032, with an estimated cut of about 25% in benefits.
Impact on Medicare funding
Beyond placing Social Security in jeopardy, the plan by Trump would also have the potential to threaten the financial stability of Medicare. Taxes levied on the benefits of Social Security go into Medicare’s Hospital Insurance Trust Fund. Removing those taxes, as Trump’s proposal would do, could hasten Medicare’s insolvency date by up to six years. That does beg critical questions as to how the government would substantiate these key programs in the absence of proper funding for them.
The Committee for a Responsible Federal Budget estimates that Medicare will lose about $650 billion in revenue over the next ten years due to this tax repeal. That lost revenue will likely necessitate new cuts to Medicare services or increased premiums on beneficiaries, further complicating access to healthcare for millions of seniors.
Who benefits from tax cuts?
While this is being framed as tax relief to help seniors, the reality is that the actual disbursement of benefits is not even. According to analyses by several think tanks, due to the cut in taxation, lower-income households would realize little to no benefit. People who earn less than $32,000 generally do not pay taxes on their Social Security income. For much wealthier retirees, though, this could be a huge policy change with great benefit.
As an example, families with incomes between $32,000 and $60,000 would see an average cut in taxes of only $90, while the wealthy could save upwards of $550 per year. This disparity can’t help but bring into question if these tax cuts benefit the poor at all or are they merely devised to provide added tax relief to rich retirees who do not need it.
Political consequences and popular opinion
Trump’s pledge to lift the taxes on Social Security benefits comes amid a broader discussion about the future of entitlement programs in America. While positioning himself as a protector of Social Security and Medicare, critics say his proposed cuts reveal that Trump does not have a stated commitment to protecting those programs without cuts. The Republican Party platform emphasizes protecting those entitlements without changes; however, it seems Trump’s plan undermines that commitment by hastening insolvency.
The public mood on Social Security is complex, many Americans are concerned about retirement security and the prospect of reduced benefits. To that degree, Trump’s proposal may appeal to those voters who need the relief now and will result in increased insecurity later.
