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During his presidential campaign, Donald Trump signaled support for ending the decades-long practice of taxing Social Security benefits on several occasions. “Seniors should not pay tax on Social Security,” Trump asserted on his social media platform in July. He then repeated the proposal in August during an interview with Fox.
Trump will return to the White House later this month, and many Social Security recipients are undoubtedly hoping the president-elect can make good on his proposal. But ending the taxation of Social Security benefits may actually be bad news for retired workers. Read on to learn more.
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President-elect Donald Trump listens to a reporter. Official White House Photo by Andrea Hanks.
More retired workers owe taxes on Social Security benefits each year
The Social Security trust fund holds money used to pay benefits. The asset reserves in the trust fund fell by 45% between 1974 and 1983 because of a growing imbalance in Social Security beneficiaries and taxpayers supporting program. In other words, the cost of paying benefits was increasing more quickly than revenues from payroll taxes.
Congress approved sweeping changes in 1983 to fix the financing problem, and one of those changes made Social Security subject to federal income tax. Initially, seniors with a combined income above a certain level owed taxes on 50% of benefits. But legislation approved in 1993 added a second combined income threshold, above which 85% of benefits were taxable.
Combined income is defined as adjusted gross income (AGI) plus nontaxable interest plus one-half of Social Security benefits. The chart below shows the taxable portion of Social Security benefits at different combined income levels based on filing status.
|
Taxable Portion of Benefits |
Single Filers |
Joint Filers |
|---|---|---|
|
0% |
Under $25,000 |
Under $32,000 |
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
Above $34,000 |
Above $44,000 |
Data source: The Social Security Administration.
Less than 10% of Social Security recipients owed income tax on their benefits when the law took effect in 1984. But that number has trended steadily upward over time and it now exceeds 50% because Congress failed to adjust the combined income thresholds for inflation.
That means the income thresholds are exactly the same today as they were a few decades ago. But Social Security payments have increased greatly during that period. That because beneficiaries get annual cost-of-living adjustments (COLAs) to account for inflation, so more retired workers owe taxes on benefits each year.
Ending the taxation of Social Security benefits could be bad news for retired workers
Social Security is often the largest source of income for retired workers, so Donald Trump’s declaration that seniors should not pay tax on Social Security benefits sounds like support for a very positive change. And it would be a very positive change under different circumstances.
However, Social Security is once again spending more on benefit payments than it receives in revenues, which is exactly what happened in the 1970s and 1980s. In fact, the program has now operated at a deficit for three straight years and the losses are expected to continue indefinitely until Congress finds a solution.
The trustees estimate the Social Security trust fund will be depleted by 2035, at which point the program will only have enough revenue to pay 83% of scheduled benefits. That means a 17-point benefit reduction could happen automatically within a decade. Ending the tax on Social Security would eliminate a source of revenue and bring those benefit cuts closer.
To elaborate, Social Security receives 4% of its funding from taxes on benefits, and eliminating that source of cash inflows would accelerate benefit cuts by more than a year, according to the Committee for a Responsible Federal Budget, a nonpartisan and nonprofit advocacy group. That’s why Trump’s proposal could be bad news for retired workers under the current circumstances.
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