The Big Social Security Change President Donald Trump Wants to Make and Why It's Unlikely
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President Trump during his recent campaign proposed eliminating taxes on Social Security benefits. "Seniors should not pay taxes on Social Security," he wrote on his social media platform in July. Trump then reiterated the point during a Fox & Friends interview in August.
The president has seemingly doubled down on his proposal since his returning to Washington. In February, White House Press Secretary Karoline Leavitt said the Trump administration is committed to implementing the "largest tax cut in history," which includes ending taxes on Social Security.
While I agree that beneficiaries should not pay taxes on Social Security, I doubt Congress will approve that change anytime soon. Here are the important details.
One problem with how the federal government taxes Social Security is the income thresholds have never been adjusted. To elaborate, benefits were first subject to taxation after Congress passed a series of amendments in 1983 meant to avoid trust fund insolvency. Legislation enacted in 1993 added a second tier of taxation.
Initially, less than 10% of beneficiaries owed taxes on Social Security, but that figure exceeds 50% today. That's because the income thresholds associated with the taxation tiers have never been modified for inflation, even though Social Security payments have gradually increased over time due to regular cost-of-living adjustments (COLAs).
Another problem is that taxing Social Security effectively amounts to double taxation. Benefits for retirees are based on the amount of income taxed by Social Security during their working years. For the government to turn around and tax those benefits (which were awarded based on payroll tax contributions) seems unfair or even underhanded.
President Trump is not the only politician to propose eliminating taxes on Social Security benefits. Lawmakers from both political parties recently drafted legislation that would let beneficiaries exclude Social Security from gross income for the purpose of calculating federal income taxes.
Rep. Angie Craig (D-Minn.) last year introduced the You Earned It, You Keep It Act, and Rep. Thomas Massie (R-Ky.) earlier this year reintroduced the Senior Citizens Tax Elimination Act. Nearly four dozen representatives, some Republican and some Democrat, have signed onto those bills as cosponsors.
However, Congress has not taken any real action, and I doubt that will change anytime soon for one reason: Social Security already has a serious financial problem that could soon deplete the OASDI Trust Fund, the account that pays benefits to retirees, spouses, survivors, and disabled workers.
The Social Security program is primarily financed (91%) through the dedicated payroll tax I mentioned earlier. But taxes paid on Social Security benefits (4%) and interest earned on trust fund assets (5%) also contribute. Importantly, the cost of paying benefits currently exceeds revenue from those funding sources.
In fact, the Social Security program has run a deficit since 2021, and the trustees estimate the 75-year funding shortfall at more than $22 trillion. Consequently, the OASDI trust fund is on pace to be insolvent by 2035, at which point the remaining tax revenue would cover only 83% of scheduled payments. That means benefits will likely be cut by at least 17% if the trust fund is depleted.
For that reason, Congress is unlikely to approve any legislation that ends taxes on Social Security. Doing so would eliminate one of the three funding sources for a program that is already in financial trouble. Indeed, a budget model from renowned business school Penn Wharton estimates ending taxes on Social Security could hasten trust fund depletion by two years.
Here is the bottom line: While I agree that beneficiaries should not pay taxes on Social Security, I also doubt Congress will make that change anytime soon. The unfortunate truth is eliminating one of the program's funding sources would be nonsensical right now, as it would leave lawmakers with less time to avoid trust fund insolvency.
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The Big Social Security Change President Donald Trump Wants to Make and Why It's Unlikely was originally published by The Motley Fool
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