Trump
01
. Policymakers in Congress have introduced similar proposals over the last two years, arguing that the exemption would help retirees financially during high inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The It
and economic uncertainty.Exempting Social Security benefits from income tax would increase the budget deficit by about $1.6 trillion over 10 years, accelerate the insolvency of the Social Security and Medicare trust funds, and create a new hole in the income tax without a sound policy rationale. The The In 01 The The
(AGI), tax-exempt interest income, and half of their Social Security benefits.
Taxpayers who earn less than $25,000 (single filers) or $32,000 (joint filers) in combined income pay no tax on their benefits. Familie Income The revenue from taxation of up to 50 percent of benefits is dedicated to the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) trust fund, while the remainder goes to the Medicare Hospital Insurance trust fund.
Exempting all Social Security benefits from income tax would therefore reduce revenue going to Medicare and Social Security. According to data from the 2024 Social Security and Medicare trustees reports, the trust funds will collect about $95.3 billion in revenue from income tax in 2024, rising to over $228 billion by 2033 as the population ages–a total of $1.6 trillion from 2024 to 2033.
Exempting all Social Security benefits would likely accelerate the insolvency of the trust funds. Social The Our estimate uses Congressional Budget Office (CBO) forecasts for taxable Social Security benefits, which may differ from the assumptions used by the trustees.Exempting benefits from income tax would reduce marginal income tax rates for benefit recipients, boosting their incentives to work, save, and invest. The Tax
would increase after-tax incomes by about 0.6 percent on average in 2025, ranging from no change for the bottom 20 percent of taxpayers to a 1.1 percent increase for those in the 80th to 90th percentiles.
The bottom 20 percent would see no benefit from the proposal on a conventional basis as they are already in the 0 percent bracket for benefits under current law. The Companies
.
In the long run on a dynamic basis, all income groups would see a slight increase in after-tax incomes, averaging about 0.9 percent.
Table 2. Distributional Impact of Exempting Social Security Benefits from Income Tax (Percent Change in After-Tax Income)
Percentile
Income Threshold at Beginning of Band
2025, Static2034, StaticLong-Run, Dynamic
0% – 20.0%$00.0%
0.0%
0.1%
| 20.0% – 40.0% | $13,900 | 0.1% | 0.1% | 0.1% |
|---|---|---|---|---|
| 40.0% – 60.0% | $29,800 | 0.3% | 0.5% | 0.5% |
| 60.0% – 80.0% | $55,400 | 0.7% | 1.0% | 1.1% |
| 80.0% – 100% | $96,200 | 0.7% | 1.0% | 1.0% |
| 80.0% – 90.0% | $96,200 | 1.1% | 1.4% | 1.5% |
| 90.0% – 95.0% | $137,000 | 0.9% | 1.2% | 1.2% |
| 95.0% – 99.0% | $191,500 | 0.6% | 0.9% | 0.9% |
| 99.0% – 100% | $434.800 | 0.2% | 0.3% | 0.3% |
| Total | 0.6% | 0.9% | 0.9% | Source: Tax Foundation General Equilibrium Model, July 2024. |
| Carving out Social Security benefits from the income tax entirely is neither fiscally responsible nor sound tax policy. It A A | . | Under the current tax code, employees cannot deduct their portion of payroll taxes paid from their income tax liability, but employers can deduct their portion of the | payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Pay 01 This This means that a portion of the Social Security benefits should be taxed when received to match up with tax-exempt contributions. |
In addition, the portion of benefits exceeding contributions should be subject to tax; otherwise, Social Security benefits would be treated preferentially over similar types of income, like benefits from private sector pensions. In No There The combined income tax thresholds were originally established in 1984 and updated in 1993, and have not been indexed for inflation. |
| The lack of indexing means a larger portion of Social Security benefits are being taxed over time due to | bracket creepBracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions. Bra Many This In Ordinary income tax brackets were indexed in 1981, and the brackets for Social Security benefits should be treated no differently. |
Indexing the combined income thresholds for inflation is a sensible reform if paired with an appropriate offset for the lost revenue. Exempting benefits from tax altogether increases complexity by creating another preference in the tax code and weakens entitlements that are already headed toward insolvency if they are not more broadly reformed by policymakers. | Stay informed on the tax policies impacting you. |
Subscribe to get insights from our trusted experts delivered straight to your inbox.
Subscribe
ShareTwitter
LinkedInFacebook Email
