Recently, social security payments have seen an uptick, largely due to legislation aimed at reversing years of benefit reductions for public sector workers.
During his campaign, former President Trump proposed exempting social security from federal income taxes, and some members of Congress are now working towards that aim. For instance:
- Rep. Angie Craig (D-Minn.) mentioned in January that if you earned it, you should keep it.
- Rep. Jeff Van Drew (R-N.J.) stated in January that he would not support exempting social security from taxes.
- In February, Rep. Thomas Massey (R-KY) introduced the Elderly Tax Elimination Act.
Trump has also urged Congress to pass a substantial tax and spending bill fulfilling various campaign promises, claiming it would lead to significant tax cuts, including no taxes on tips, social security, or overtime pay.
However, altering tax laws in such ways could ultimately harm retired workers relying on social security.
Current Tax Laws Threaten Future Benefits
According to projections, social security benefits might be cut by 23% by 2035 under existing tax laws. The system is largely funded through payroll taxes (91%), supplemented by taxes on benefits (4%) and interest from trust fund assets (5%). Currently, there are more retirees drawing benefits than there are workers contributing to the system, leading to a situation where expenditures frequently exceed income.
The Congressional Budget Office (CBO) estimates that the Social Security Trust Fund will run out by 2034. After that point, without interest income, the remaining tax revenue is expected to cover only 77% of scheduled benefits for 2035. If no solutions are found by lawmakers, the potential reduction is concerning.
Tax Elimination Risks Faster Depletion
The CBO predicts a $3.3 trillion deficit for social security over the upcoming decade, with taxes on benefits contributing to $1.1 trillion in revenue. Removing these taxes could significantly exacerbate the deficit, potentially hastening the depletion of trust funds. This would mean that Congress has less time to address substantial reductions in benefits.
In fact, estimates suggest that these proposed tax changes could decrease social security revenues by up to $2 trillion over the next ten years. Consequently, benefit cuts might be even more severe—projected reductions could reach 33% by 2035, surpassing the 23% predicted under current laws.
Ultimately, representatives from both political parties are looking at eliminating taxes on social security benefits. Trump’s insistence on exempting social security benefits from federal income tax may be appealing, but it could have negative repercussions for retirees relying on these funds. As Nancy Altman of Social Security Works pointed out, while it sounds beneficial, it could lead to real reductions in the very benefits that people depend on.
