President Donald Trump has proposed a significant policy change: the elimination of income taxes on Social Security benefits. While the initiative promises relief for many, it carries substantial fiscal implications for the U.S. economy. The Penn Wharton Budget Model (PWBM) and the Congressional Budget Office (CBO) have conducted analyses revealing the complex consequences of this plan. If enacted, it would reduce government revenues by $1.5 trillion over a decade and accelerate the depletion of the Social Security Trust Fund.
Eliminating taxes on Social Security benefits would notably increase the federal debt. The PWBM estimates an increase of 7% by 2054, posing a significant challenge to fiscal sustainability. This potential policy change would also shift the Social Security Trust Fund depletion date two years earlier, exacerbating concerns about long-term solvency.
The impact of such a policy is not uniform across all income levels. The proposed tax elimination would disproportionately benefit high-income households, offering them gains of up to $100,000 over a lifetime. In contrast, lower-income earners would see only modest benefits. Those in the second and third quartiles might experience gains ranging from $15 to $340 in 2026 and from $275 to $1,730 by 2054.
Currently, Social Security benefit taxation is determined by combined income, which includes adjusted gross income, non-taxable interest, and half of Social Security benefits. Individuals with combined incomes below $25,000 (or married couples below $32,000) generally do not pay taxes on their benefits. However, those with incomes between $25,000 and $34,000 (or married couples between $32,000 and $44,000) may have up to 50% of their benefits taxed. For higher earners—individuals with incomes exceeding $34,000 or couples above $44,000—up to 85% of their benefits can be taxed.
The proposed tax elimination would be more expensive than other budget and tax measures. According to the CBO, this change would cost nearly $200 billion over 10 years. The fiscal impact raises concerns about who bears the burden of funding Social Security.
"Who pays for that benefit is actually younger people,"
– Kent Smetters, professor of business economics and public policy at the University of Pennsylvania's Wharton School.
The impact on the Social Security Trust Fund is also critical. By moving its insolvency six months closer, as per the CBO's analysis, this policy change raises alarms about future beneficiaries' security. Lawmakers have expressed concerns regarding these potential shifts.
"Keep your hands off our Social Security,"
– Lawmakers
Despite the potential financial relief for some beneficiaries, the elimination of taxes on Social Security benefits requires bipartisan support from both the House and the Senate. Achieving this consensus could prove challenging given the significant budgetary implications.