In 1984, the federal government began taxing Social Security benefits for individuals whose income exceeded a certain threshold. Congress approved the change in the previous year as part of a sweeping overhaul meant to protect the Social Security trust fund from insolvency.

Initially, the impact was limited. Less than 10% of beneficiaries actually owed tax on their benefit when the law took effect. However, that figure has climbed steadily higher over the years because Congress neglected to account for inflation, such that more than 50% of beneficiaries now owe tax on their Social Security checks.

While campaigning, Republican presidential nominee Donald Trump suggested eliminating that tax. “Seniors should not pay tax on Social Security,” he declared on his social media platform in July. Trump repeated the proposal during a subsequent interview. Now that he’s been elected to a second term as president, millions of retirees are hoping he can follow through.

Unfortunately, a harsh truth makes that change unlikely: Social Security is dealing with a serious financing problem, and eliminating the tax on benefits would make the problem worse. Read on to learn more.

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How Social Security benefits are taxed by the federal government

Social Security benefits are subject to federal income tax when combined income exceeds certain thresholds. Combined income is defined as the sum of 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 thresholds for single filers and married couples filing jointly.

Data source: The Social Security Administration.

Importantly, the combined income thresholds have never been adjusted because Congress failed to account for inflation when it granted the federal government the authority to tax benefits. That has been problematic because Social Security payments generally increase each year due to rising wages and annual cost-of-living adjustments (COLAs).

Consequently, the percentage of retirees that owe tax on their Social Security benefits has increased markedly over the years, and the number will continue to grow until lawmakers eliminate the tax or adjust the combined income thresholds. Unfortunately, Congress is unlikely to make either change in the near future.

The harsh truth about eliminating the tax on Social Security benefits

Donald Trump is not the first politician to suggest eliminating the tax on Social Security benefits. For instance, Rep. Angie Craig (D-Minn.) introduced a bill earlier this year that would exclude Social Security from taxable income beginning in 2025, and other politicians have drafted similar legislation in previous years. But none of those proposals have gained traction in Congress.

The reason for that is simple: Social Security is already facing a more serious problem. The program is mostly funded by payroll taxes, but the number of beneficiaries has been increasing more quickly than the number of taxpaying workers for years. As a result, the cost of paying benefits now exceeds revenue, meaning the Social Security program is operating at a loss.

The Board of Trustees estimates the funding shortfall at $22.6 trillion through 2098. Without Congressional intervention, the Social Security trust fund could be depleted by 2035, at which point only 83% of scheduled benefits would be payable. Eliminating the tax on Social Security benefits would eliminate a source of program revenue, making the problem worse.

Rep. John Larson (D-Conn.) discussed the problem with Donald Trump’s proposal during an interview with CNBC in August. “He comes out and says he’s going to have a tax break, but doesn’t say how he’s going to pay for that,” Larson explained. “In essence, his proposal would end up cutting the Social Security trust fund.”

There is a silver lining: Congress will have to address Social Security’s $22.6 trillion funding shortfall in the next decade, which means another sweeping overhaul is on the horizon. That gives lawmakers an opportunity to eliminate the tax on Social Security, though doing so would require a reduction in program expenses (benefit cuts) or an increase in revenue (higher payroll taxes).

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