How much money can a retiree save if Trump succeeds in eliminating Social Security taxes?
Trump’s proposal to eliminate taxes on Social Security benefits wouldn’t put more money into the pockets of the majority of recipients, perhaps the contrary.
Former President Donald Trump is seeking to garner votes from one of the largest voting blocks with a proposal targeted specifically at them. He wants to eliminate taxes on seniors’ Social Security benefits. However, most Social Security beneficiaries currently don’t have to pay any federal taxes on the money that they receive from the program which they contributed to through their payroll taxes while working.
The people who would benefit the most from the measure would be wealthy Social Security recipients, who see up to 85% of their benefits taxed. Furthermore, all beneficiaries could see the amount that they receive cut under such a plan if implemented.
That’s because the idea is severely flawed if he doesn’t have a way to replace the tax dollars that would be lost. The funds that are collected from the 40% of Social Security beneficiaries that do pay taxes on benefits go toward supporting the trust funds for Social Security Old-Age and Survivors Insurance (OASI) and Medicare Hospital Insurance (HI) to keep them solvent.
While changes are needed to keep them from running out of money in 2033 and 2036, respectively, according to the latest estimates by their respective Boards of Trustees, experts warn that Trump’s proposal, without replacement funds, would accelerate the insolvency of OASI by a year and Medicare HI by six years. Furthermore, the revenue reduction would grow over the long run. The 75-year shortfall for Social Security would increase 25% and nearly triple that of Medicare HI the Committee for a Responsible Federal Budget (CRFB) determined.
When those funds run out of money, law requires that spending be cut to match revenue. In the case of Social Security, benefits for seniors would be cut by 25%, compared to 21% under current law.
The drop in benefits would impact lower income seniors more with bigger reductions than those for higher income seniors. However, CRFB notes that “after-tax benefits would not meaningfully change.”
Who pays taxes on Social Security benefits
The US government started taxing Social Security benefits in 1984 to solve a funding shortfall for the program. While Social Security benefits are automatically increased each year to make sure inflation doesn’t reduce their purchasing power, the Total Gross Income thresholds above which benefits get taxed are not indexed.
This means that over time more and more Social Security recipients will have to pay federal income tax at some level on the benefits they receive. Currently, Individuals with a Total Gross Income, including Social Security, of more than $25,000 will be taxed on up to 50 percent of their Social Security income. Couples who file jointly will begin being taxed when their total income exceeds $32,000.
Individuals earning more than $34,000, or couples with a combined gross income of at least $44,000, will be taxed on up to 85 percent of their Social Security benefits.