Bad news for retirees? Trump proposes major Social Security reform and it looks like this

In the 1980s, as union power diminished and jobs were sent overseas, pensions were increasingly replaced by private retirement accounts such as 401(k)s and Roth IRAs. Employers benefit from these plans because contributions are tax-deductible, reducing their overall tax burden. However, as workers who were offered these retirement accounts begin to retire, their combined monthly payments from these plans—along with their Social Security benefits—often remain subject to taxation.

Now serving as president, Donald Trump has reaffirmed his campaign promise to eliminate federal taxes on Social Security benefits. While there are strong arguments in favor of this policy, it also presents significant challenges. During his address to Congress in early March, he urged Congress to pass a law to exempt Social Security benefits from taxation.

The Social Security fund remains financially strained, with more money being withdrawn than contributed. Taxes on Social Security benefits help to offset this shortfall, and removing them would widen the gap, further destabilizing a program that tens of millions of seniors rely on as their primary source of income.

While eliminating these taxes would increase take-home income for many seniors, it does not address the broader issue of ensuring the long-term solvency of Social Security. Without additional reforms—such as lifting the income cap on Social Security taxes—this policy change could exacerbate the program’s financial difficulties rather than resolve them.

An antiquated system for taxation

According to the Social Security Administration (SSA), about forty percent of Social Security beneficiaries pay taxes on their benefits. However, the income levels under which taxation is determined were set in 1984 and have yet to be adjusted for inflation, meaning that many more beneficiaries are subject to tax because of these outdated thresholds.

Below, you will find the income thresholds determining which Social Security recipients see their benefits taxed and what they would look like if they had been adjusted for inflation.

The “stealth tax” paid by some seniors

Some financial planners, like Jordan Gilberti, who serves as a senior lead planner and certified financial planner at Facet, see the fact that these thresholds have not been adjusted as a “stealth tax” as so few understand the mechanisms. In an interview with USA Today, Gilberti said that while many people realize that “Social Security gets taxed,” they often don’t know how, and when he explains the process, “people’s jaws would fall to the ground.” The US Census Bureau put the median household income for seniors at $50,290 in 2022. In other words, many of these households might not be paying taxes on their benefits if these thresholds were adjusted.

Creating a hole that threatens fiscal solvency

Another perspective should be considered in the debate over taxing Social Security benefits. There are two primary arguments against taxing these benefits. The first, which motivates politicians like President Donald Trump, is that seniors shouldn’t have to pay taxes on benefits they already funded through payroll taxes during their working years. This argument is even more compelling given that around 10% of seniors live in poverty. For those just above the poverty line but still struggling, taxing these benefits can make budgeting even more challenging.

However, if tax thresholds were adjusted for inflation, the vast majority of beneficiaries would not be taxed. Those who would still pay taxes on their benefits tend to be high-net-worth individuals who may not have contributed their fair share of Social Security taxes while in the workforce. But what does “not paying their fair share” mean? All workers earning under $132,900 per year pay 12.4% of their income into Social Security—split evenly between the worker and their employer. However, those earning above this threshold only have their income taxed up to that cap.

By lifting this income cap, the federal government could ensure the long-term solvency of Social Security while also expanding benefits. For example, this reform could fund a $1,300 benefit increase for seniors currently receiving less than $16,000 annually—a group that makes up nearly 30% of all beneficiaries. Expanding benefits in this way would reduce the need for taxation on Social Security, though it wouldn’t entirely solve the problem of ensuring seniors have adequate retirement income.

At the same time, President Trump’s plan to eliminate taxes on Social Security benefits doesn’t fully address this issue either. While it would increase net incomes for some seniors, as the data below shows, it wouldn’t drastically alter the financial situations of most beneficiaries. Moreover, since the Social Security fund remains financially strained, eliminating these taxes could further weaken the program’s stability without additional measures to secure its long-term funding.

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