This move, at face value, appears to help retirees on fixed incomes. But it comes with huge implications for the long-term solvency of the Social Security program and financial security for future retirees.
Current taxation of Social Security benefits
Under current federal law, Social Security benefits are taxed based on a recipient’s combined income. For recipients with combined incomes between $25,000 and $34,000 and married couples filing jointly with incomes between $32,000 and $44,000, up to 50 percent of benefits may be taxed. Those with combined incomes above these thresholds face tax rates on up to 85 percent of their benefits. Roughly 40 percent of Social Security beneficiaries pay taxes on their benefits while the remaining 60 percent fall below the thresholds.
Possible impact of taxes on Social Security benefits removal
Eliminating the taxes on Social Security benefits would allow current retirees to keep more of their earnings, providing a quick boost in pocketbook relief. But it would also mean that even less money would come into the financially beleaguered Social Security Trust Funds, which are already depleted. The 2024 Social Security Trustees Report says that OASI Trust Fund reserves will be exhausted by 2033, at which point income would be sufficient to pay only 79 percent of scheduled benefits.
Cutting revenue through tax eliminations would accelerate this depletion, forcing benefit cuts to arrive sooner or be deeper.
Concerns over payroll tax cuts
In addition to his plan to eliminate taxes on benefits, President Trump has floated the idea of cutting payroll taxes, one of the main ways Social Security is funded. Currently, employers and employees each pay 6.2% of wages into the program. Reducing or eliminating these contributions without identifying alternative funding sources could further undermine the solvency of the Social Security Trust Funds.
The committee for a responsible Federal Budget warns that such policies could lead to insolvency within six years, resulting in benefit cuts.
Alternative funding proposals and legislative challenges
To offset the revenue loss created by the tax cuts, President Trump has proposed that additional revenue from higher tariffs on imported goods would help make up for it.
The administration believes that a 10% tariff could raise $350 to $400 billion a year. That is well below the estimated $4 trillion cost of extending the tax cuts over ten years. Moreover, many Republicans in Congress have concerns about the reliability of tariff revenue and its impact on the economy, especially for consumers and low- and middle-income households. Substantial cuts to programs like Social Security and Medicare might be necessary to balance the budget, a prospect causing significant debate among lawmakers.
Anticipating benefit cuts planning for potential reductions in benefits
Financial experts, because of the question marks hanging over the future funding of Social Security, say persons nearing retirement should plan on possibly reduced benefits. It would be reasonable for a person who expects to get the full benefit to assume they are going to receive 75 percent of the amount.
This can also be diversified by personal savings, 401(k), and Individual Retirement Accounts that may soften such prospective reductions to a minimum. It can be achieved by highlighting safe and stable investments such as money market accounts, certificates of deposit (CDs), and bonds to keep the retirement portfolios from market volatility.
