Donald Trump has promised a $1.5 trillion tax cut to eliminate income taxes on Social Security benefits. While popular among voters, the proposal raised concerns about its impact on the already strained Social Security system and the broader federal budget.
The former President's plan taps into a long-simmering frustration among retirees who are often surprised to find their Social Security benefits subject to taxation. According to Social Security Administration data cited by the Wall Street Journal, half of all recipients paid taxes on their benefits in 2023, an increase from just 10% when the tax was introduced in 1983.
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Trump's proposal appeal was evident in a WSJ poll which found that 83% of respondents favored eliminating taxes on Social Security benefits. Even when informed that the change could increase the national debt, a majority still supported the idea.
The proposal comes at an important time for Social Security. The program is projected to face a shortfall within the next decade, potentially triggering automatic benefit cuts if Congress fails to act.
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The WSJ said the income tax on benefits currently accounts for about 4% of Social Security’s revenue and its repeal would accelerate the program’s fiscal challenges.
Democrats have countered with their proposal spearheaded by Connecticut Rep. John Larson. Their bill would reduce, but not eliminate, the tax on benefits while expanding the program. To offset the costs, it proposes new taxes on high earners, applying Social Security taxes to wages and investment income above $400,000.
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“We do something [Trump] doesn’t,” Rep. Larson told the WSJ. “We pay for it.”
Nancy Altman, who worked on the 1983 reform and now leads the advocacy group Social Security Works, noted the tax’s enduring unpopularity. “From the beginning, it’s not been well understood and been very unpopular,” Altman said.
The current system creates a compounded tax situation for many retirees. Benefits become taxable when a recipient’s total income, including half of their Social Security benefits, exceeds certain thresholds. The structure can result in surprisingly high marginal tax rates for working retirees, potentially discouraging them from seeking employment.
Some economists suggest that eliminating the tax could have mixed effects on the labor market. While it might encourage some seniors to work longer or return to the workforce, it could also lead others to retire earlier, knowing they’ll keep more of their benefits.
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Policy experts have proposed different approaches that could achieve similar goals without the price tag of Trump’s plan. Kyle Pomerleau of the American Enterprise Institute suggested including benefits in income from the first dollar while raising the standard deduction. This could prevent high marginal tax rates without “hemorrhaging $1.5 trillion,” Pomerleau argued.
Eric Beckman, a voter and 71-year-old retiree in Pennsylvania, sees potential benefits for middle-income retirees like himself, though he shared concerns about the impact on government finances.
The Tax Policy Center estimates that the tax cut would benefit 16% of all households, giving an average increase of $3,400.
With Social Security’s financial health already in question, any major changes to its revenue structure will likely face scrutiny in the months ahead.
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This article Trump's Plan To Cut Social Security Taxes Is A Hit With Voters – But What's The Catch? originally appeared on Benzinga.com
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