President Donald Trump’s recent proposal to eliminate federal income taxes on Social Security benefits is set to significantly benefit older millennials in their 40s within the highest income brackets, according to a report by the Penn Wharton Budget Model, a nonpartisan research group. The proposal aims to alleviate financial pressures on seniors by boosting their Social Security checks, which could potentially stimulate the economy. However, while it offers short-term gains for some, the Penn Wharton Budget Model report highlights long-term financial risks.
This policy would expedite the depletion of the Trust Funds by two years and largely favor wealthier, older individuals at the expense of younger and future generations. Social Security, a lifeline for roughly 65 million Americans, currently includes taxes that contribute billions to federal revenue annually. These taxes are tiered based on combined income levels.
Trump’s proposal would eliminate federal income tax on Social Security benefits, but not all generations will prosper. The report found that the elimination of these taxes would most benefit older millennials in their 40s who are in the highest income brackets, suggesting an increase in lifetime welfare equivalent to a one-time payment of $12,400. Kent Smetters, Boettner Chair Professor at the University of Pennsylvania’s Wharton School, stated, “The tax cut mostly benefits higher income people because the benefits tax that is being removed only applies to higher income households.”
High-income individuals close to retirement would benefit the most—specifically, 70-year-olds in the 80th to 100th income percentile.
Wealthy millennials gain from tax cut
These individuals could see lifetime welfare gains equivalent to up to $43,600. On the other hand, younger individuals and future generations would fare the worst under the proposed policy change.
The model predicts that unborn households, representing future generations, could face significant welfare losses, ranging from $11,700 to $22,000. Maria Freese, senior legislative representative at the National Committee to Preserve Social Security and Medicare, disagrees with the analysis. We think the impact will be more dramatic on current retirees and those nearer to retirement age because these older adults, including Millennials, would not have as much time to increase their private savings in the face of inevitable Social Security cuts that will result when the Social Security trust fund becomes depleted,” Freese said.
She noted that this assumes no intervention to enhance the financial stability of Social Security. Kent Smetters observed, “Middle-aged and older people gain since they receive the tax cut benefits but are not required to finance much of it since they will not earn as much future taxable income as younger people.
Maria Freese raised concerns over the proposal’s impact on the trust fund, criticizing it for hastening the depletion date by two years. “All current and future beneficiaries deserve to know that they will receive their full earned benefits, as they have been able to do for nearly ninety years,” Freese stated.
Roger Marshall, a Kansas Republican, supported the proposal, saying, “After four years of record-high inflation, the current tax on Social Security has been devastating to America’s retirees. By cutting taxes on Social Security, this bill will ensure America’s seniors can keep more of their hard-earned money.”
While Trump’s proposal to eliminate federal income taxes on Social Security benefits might offer significant advantages to older, wealthier millennials, younger generations and future beneficiaries could face substantial welfare losses, raising questions about the sustainability and fairness of the Social Security system.
