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As we approach the presidential election on November 5, 2024, both candidates continue to pepper their campaign appearances and social media posts with political themes. Social Security is a key institution in the economic and social lives of Americans, and the period leading up to Election Day promises to be a time of broad public discussion about the troubled 89-year-old program.
Republican candidate Donald Trump’s plan to eliminate taxes on retirement income is drawing support from the former president’s allies who believe the law would improve Social Security’s long-term solvency. But it is facing stiff opposition from Representative John Larson (D-Connecticut), a ranking member of the House Appropriations Committee’s Social Security Subcommittee, who called the idea a “fatal mistake.”
According to Devin Carroll, senior adviser at the Carroll Advisory Group, Trump’s idea is not new. “Earlier this year, Democratic Rep. Angie Craig of Minnesota reintroduced the You Earned It, You Keep It Act, which would also eliminate taxes on Social Security benefits. Her proposal was praised because it not only eliminated those taxes, but also extended the life of the Social Security trust funds by nearly 20 years and helped reduce the national debt by taxing more income for Social Security.”
Recently, several legislative proposals have been introduced to help secure Social Security for future generations. In addition to Craig’s You Earned It, You Keep It Act and Larson’s Social Security 2100 Act,
A number of senior Democratic senators, including Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.), introduced the Social Security Expansion Act at a Senate Budget Committee hearing in June 2022.
As the presidential election progresses, stay tuned to what the candidates have to say on the issue. Here are four things that could happen if Trump is elected and eliminates taxes on Social Security benefits. Be sure to talk to your financial advisor if you think these things could impact you.
1. Immediate impact on social security financing
Cutting taxes on Social Security is a risky move, especially for someone who has not considered a wealth tax in the past. As Larson noted of Trump’s recent statements on Social Security, “He says he’s going to do tax relief, but he doesn’t say how he’s going to fund it.”
To finance Social Security benefits, the government may need to divert money from general tax revenues, which could lead to higher budget deficits or program cuts. In addition, tax increases or the possible imposition of new tax rates could be used to offset the loss in Social Security tax revenues.
While most solutions involve taxing the wealthiest Americans to finance the cuts, Social Security may need to see changes such as raising the retirement age or making payments income-based. If the federal government has to borrow, the national debt could soar to maintain Social Security benefits because there are no alternative sources of funding.
2. Long-term impact on social benefits
The Social Security tax is one of the main sources of funding for the Social Security Fund. Eliminating this tax would dramatically reduce the flow of funds and potentially jeopardize the program’s ability to pay benefits.
“In 2024 alone, more than $50 billion in benefits taxes flowed into the Social Security trust fund,” Carroll said. “That amount is expected to nearly triple in the coming years because the income limits that trigger those taxes have not been updated since 1983 and 1993.”
Without that revenue, the Social Security Trust Fund could run out of money more quickly, meaning that benefits for retirees could be cut now and in the future unless another source of funding is found.
“Financial planners like me are concerned about the long-term impact on the sustainability of the Social Security program,” said Taylor Kovar, CFP, founder and CEO of 11 Financial, based in Lufkin, Texas. “Eliminating these taxes could seriously jeopardize funding and potentially lead to cuts or benefit reductions for future retirees who rely on Social Security for a large portion of their retirement income.”
3. Economic consequences
Despite the long-term threat to the program’s viability, eliminating social security contributions would increase workers’ net income by the amount they currently pay: 6.2 percent of their income, up to a certain limit (employers would also save the same amount in contributions).
Both Kovar and Carroll acknowledge that the immediate impact of a Social Security tax cut will benefit workers and retirees, but are more concerned about the long-term consequences. “Trump’s proposal to eliminate the Social Security tax could provide immediate benefits to average Americans by increasing their take-home pay, allowing for more consumer spending,” Kovar said, and Carroll mentioned that “paying retirees an additional $50 billion could stimulate the economy because they would have more money to spend.”
4. The actual impact on employees and pensioners
When we talk about tax cuts, we have to ask ourselves, “Who will benefit?” As Mark Luscombe, LD, LL.M, CPA, and principal analyst at tax and accounting experts Wolters Kluwer, noted, lower-income households would see little to no benefit from the 2025 tax cut.
“Currently, single taxpayers with total income (adjusted gross income plus tax-free interest plus half of Social Security benefits) under $25,000 ($32,000 if filing jointly) pay no taxes on Social Security benefits,” Luscombe said.
“Those with total incomes above $25,000/$32,000 will pay taxes on 50 percent of Social Security benefits, or 85 percent of Social Security benefits if total income increases,” he added. “Taxpayers with incomes above these amounts would therefore benefit directly.”
According to an analysis by the Tax Policy Center released on August 1, Trump’s proposed tax cuts could save U.S. households an average of $550 in 2025. “In the short term, (Trump’s plan) will provide a fairly modest benefit to welfare recipients on average,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, told CNBC. “But almost all of the benefit will go to high-income retirees who don’t really need it.”
Tax cuts are good campaign promises, but Social Security is an extremely popular government welfare program that has been around for 89 years and is currently on shaky ground. “Trump’s plan to stop taxing Social Security benefits has received a lot of attention, but the details are still uncertain,” Carroll said.
In the coming months, both presidential candidates will have to address the looming crisis in Social Security funding by finding compromises on taxation, retirement ages, and other issues. But that, as the saying goes, is a discussion for another time.
Editor’s Note on Election Coverage: GOBankingRates is nonpartisan and strives to objectively cover all aspects of the economy and present balanced reporting on politically focused financial topics. For more coverage on this topic, visit GOBankingRates.com.
