President Donald Trump has announced plans to eliminate income taxes on Social Security benefits. A new report finds this change would reduce U.S. government revenues by $1.5 trillion over 10 years and increase the federal debt by 7% by 2054.
The report suggests that high-income households would benefit the most from this policy. They might see gains of up to $100,000 over their lifetimes. However, individuals under age 30 and future generations may face the most significant losses.
This is due to increased federal debt and reduced incentives to work and save for retirement. Kent Smetters is a professor at the University of Pennsylvania’s Wharton School. He notes that beneficiaries who have paid into Social Security their entire working lives feel that their benefits should not be taxed.
When Congress passed Social Security reform in 1983, benefits became subject to taxes for the first time. In 1993, lawmakers added a second taxation tier. Today, beneficiaries with “combined income” below certain thresholds do not generally pay taxes on their Social Security benefits.
Combined income is the sum of adjusted gross income, non-taxable interest, and half of Social Security benefits. Beneficiaries may pay taxes on up to 50% of their benefits if their combined income is between $25,000 and $34,000 for individuals or $32,000 and $44,000 for married couples.
Impact on government revenues
Up to 85% of benefits can be taxed for individuals with combined income over $34,000 or married couples over $44,000. These thresholds are not adjusted for inflation, so more people have become subject to taxes on their benefits over time. Any changes to Social Security would require bipartisan support in both the House and the Senate.
According to the research initiative, eliminating taxes on Social Security benefits would reduce revenues by $1.5 trillion over 10 years. This would move Social Security’s trust fund depletion date two years closer. William McBride is the chief economist at the Tax Foundation.
He said that due to the already alarming budget situation, potential tax cuts are limited. The report suggests eliminating taxes on Social Security benefits would lead to significant gains for high-income households. Annual benefits could range from $1,625 to $2,450 in 2026, increasing to $4,075 to $5,080 by 2054.
Lower-income earners would see much smaller gains. Future generations, particularly those born further in the future, would bear the costs of this change. Another proposal in Congress calls for eliminating taxes on Social Security benefits while requiring high earners to pay more into the program.
However, this could create an intergenerational imbalance, leading to higher taxes for younger people. “Who pays for that benefit is actually younger people,” Smetters said. “They now pay higher taxes to pay for that.”
