Trump’s Proposal to Eliminate Taxes on Social Security Benefits Would Favor Higher Earners

On the campaign trail, President Donald Trump promoted a plan to abolish income taxes on Social Security benefits.

Now in office, officials from the Trump administration confirmed to CNBC.com last week that the president is “doubling down” on that commitment.

A bill aimed at eliminating these taxes—the Senior Citizens Tax Elimination Act—was recently reintroduced in the House.

However, removing taxes on Social Security benefits could potentially decrease U.S. government revenues by $1.5 trillion over the next decade and increase federal debt by 7% by 2054, based on analysis from the Penn Wharton Budget Model, a nonpartisan research initiative at the University of Pennsylvania.

The study also indicated that certain high-income households might gain up to $100,000 over their lifetimes under this policy shift. Conversely, individuals under 30 years old—especially those not yet born—could endure the most significant losses as federal debt grows and incentives for work and retirement savings diminish.

According to Kent Smetters, a professor of business economics and public policy at the Wharton School, beneficiaries who have consistently contributed to the program throughout their working lives feel that their benefits should not be subject to taxation.

When Congress enacted Social Security reform in 1983, benefits became taxable for the first time. Then, in 1993, lawmakers introduced a second tier of taxation.

As it stands, beneficiaries with a “combined income” of less than $25,000 for single filers—or $32,000 for married couples filing jointly—typically do not have to pay taxes on their Social Security benefits, as noted by the Penn Wharton Budget Model.

Combined income is defined as the total of adjusted gross income, non-taxable interest, and half of Social Security benefits.

Individuals may owe taxes on up to 50% of their benefits if their combined income falls between $25,000 and $34,000; for married couples, this applies if their income is between $32,000 and $44,000.

More from Personal Finance:
‘Keep your hands off our Social Security,’ lawmakers warn amid DOGE budget cuts
Americans’ proposed changes to address Social Security’s funding gap
Why retirees may find 2025 Social Security COLA inadequate

For those with combined incomes exceeding $34,000, up to 85% of their benefits could be taxable; for married couples, this threshold is set at over $44,000.

These thresholds are not adjusted for inflation, meaning an increasing number of people will fall under the taxation of their Social Security benefits over time.

Any alterations to Social Security would necessitate bipartisan agreement from both the House and the Senate.

Both chambers of Congress recently voted overwhelmingly in favor of the Social Security Fairness Act, which would eliminate benefit reductions for those also receiving pensions from jobs that did not involve Social Security payroll tax contributions.

This change is projected to cost nearly $200 billion over the next decade and bring the insolvency of the Social Security Trust Fund six months closer, as indicated by the Congressional Budget Office. Before this change, Social Security’s trustees estimated that the program’s combined funds might be depleted by 2035, at which point 83% of retirement, disability, and other benefits would still be payable.

In contrast, abolishing taxes on Social Security benefits would be even more costly—resulting in a $1.5 trillion revenue reduction over 10 years—provided the policy is implemented by 2025. This would also expedite the depletion date for Social Security’s trust fund by two years, according to the analysis.

Due to the “highly concerning budget situation” lawmakers are currently facing, any tax cuts will likely be subjected to considerable restrictions, according to William McBride, chief economist at the Tax Foundation.

Specifically, if Republican attempts to extend the Tax Cuts and Jobs Act succeed, it could incur an expense of about $4 trillion. This tax package, originally passed in 2017, does not address Social Security.

This limitation leaves minimal opportunity for exempting Social Security income from taxes or pursuing many of the other “costlier” proposals put forth by Trump during his campaign, McBride noted.

It’s important to understand that changes to Social Security cannot be accomplished through the reconciliation process, which may be utilized to fast-track other budget and tax initiatives.

Should taxes on Social Security benefits be removed, higher-income households would benefit the most from tax reductions, the Penn Wharton Budget Model shows. This benefit could translate to annual gains ranging from $1,625 to $2,450 in 2026, escalating to $4,075 to $5,080 by 2054.

In contrast, lower-income individuals would see much smaller increases, with those in the second and third income quartiles netting between $15 and $340 in 2026 and between $275 and $1,730 in 2054, as noted by Wharton’s analysis.

All future generations are expected to fare worse, with the most significant drawbacks impacting those born later, according to the analysis.

Another proposal in Congress also seeks to abolish taxes on Social Security benefits while mandating that higher earners contribute more toward the program to help offset the increased benefits.

Nevertheless, this legislation raises concerns that while older beneficiaries may enjoy heightened benefits, it will impose financial strain on younger generations, cautioned Smetters.

Economists often label this as implicit debt, where an intergenerational imbalance burdens future generations with inflated costs.

“The younger population ultimately bears the cost for these benefits,” Smetters asserted. “They face higher taxes to cover these expenses.”