President Donald Trump and some Republican lawmakers have proposed eliminating taxes on Social Security benefits. However, experts say this could harm the program’s long-term financial stability. Social Security is mainly funded by payroll taxes, taxes on benefits, and interest earned on trust fund assets.
The program is currently running deficits, and the trust fund is projected to be exhausted by 2034. Eliminating taxes on benefits would reduce Social Security’s revenue by up to $2 trillion over the next decade. This could move trust fund depletion forward by one to two years, according to estimates from the Committee for a Responsible Federal Budget (CRFB) and Penn Wharton.
If the trust fund is depleted sooner, Congress would have less time to address the financing problem.
Debate over Social Security tax cut
Benefits could be cut by as much as 33% by 2035, up from the 23% cut projected under current law.
Nancy Altman, President of Social Security Works, told Kiplinger, “[Trump’s] talking about getting rid of taxation, which increases benefits, but the very benefits that are subject to taxation will be much reduced. So basically, it’s not an honest proposal.”
As an alternative, House Republicans have proposed a new $4,000 deduction for seniors ages 65 and over. This “bonus” would be available to those who meet certain income requirements and would apply to tax years 2025 through 2028.
The deduction would reduce the amount of seniors’ income subject to taxes, but it is not as generous as a tax credit. Experts suggest that a median-income retiree may see their taxes cut by a little less than $500 per year with this change. The $4,000 deduction is seen as a more equitable way to provide additional benefits to retirees than eliminating the tax on Social Security benefits.
It would not directly impact Social Security’s trust funds and would cost around $200 billion over ten years if made permanent.
