Trump’s Social Security Tax Repeal Will Lower Taxes But Accelerate Program insolvency
The Tax Policy Center estimates that Donald Trump’s plan, which would repeal the tax on Social Security Benefits, would reduce taxes for US households in the US by an average $550. But that tax cut would come with a big price: By reducing Social Security and Medicare hospital insurance (HI) revenues by $1.5 trillion over the next decade, Trump would drive both programs into insolvency faster, resulting in sharply reduced benefits for tens of millions of recipients.
Winners And Losers
TPC estimated that lower-income households would get little or no benefit from the tax cut in 2025. The tax cut would not be available to those earning less than $32,000, as most of their Social Security income is already untaxed. The average tax cut for those earning between $32,000 and $60,000.00 would be about $90.
.10In dollar terms the biggest winners are those in the top 0.1% of income who earn nearly $5 million or higher. In 2025, they’d receive an average tax reduction of almost $2,500. The apparent inconsistency can be explained by the fact that Social Security benefits are often a large part of middle-income households’ earnings. Thus, repealing the tax on those benefits reduces their average after-tax income by a larger percentage than for very high-income households, who get a relatively small amount of their total income from Social Security.
Less than 1 percent of the lowest-income households (those making about $33,000 or less, would get any tax cut at all. About 28 percent of households with middle incomes would receive a tax reduction. The TPC’s analysis covered all Social Security benefits including survivor and disability benefits as well as retirement. It was unable to break out taxpayers by age due to data limitations.
Trump announced his idea in one sentence on his Truth Social site. Remember that he’s not talking about the Social Security tax, which current workers pay to fund Social Security and Medicare HI trust funds. The revenue is used to shore up the Social Security retirement trust fund. That revenue is used to shore up Social Security’s retirement trust fund.
The Cost To Social Security And Medicare
Social Security recipients with annual incomes over $34,000 ($44,000 for married couples), are taxed on an additional 35 percent of their benefits, with that revenue going to help support Medicare HI.
Repealing the tax, which has been in place since 1984 and was expanded in 1994, would accelerate the looming insolvencies of both trust funds. Social Security’s promised benefits would be reduced by a quarter if the tax was repealed, according to the Committee for a Responsible Federal Budget. The trust fund for old age would be insolvent by 2032, not 2033. The Medicare HI trust fund would become insolvent in 2030, six years faster than under current law.
Lower Taxes, Fewer Benefits
Low-income households not only would miss out on any tax cut, they’d take a significant financial hit when Social Security falls into insolvency. In a recent analysis by my Urban Institute co-workers Richard Johnson and Karen Smith, they found that Social Security insolvency could reduce annual median benefits of $5,900 per year by 2045, and push 3.8 million seniors to poverty. It would slash incomes of the lowest-income 40 percent of households by one-fifth.
And they analyzed current law. The situation would be worse for low-income older adults if the Social Security benefits tax is repealed, which would magnify and accelerate the program’s financial woes.
Repealing the tax on Social Security benefits conflicts with Trump’s months-long promise to oppose any cuts in the program. The Republican Party platform for 2024, orchestrated by Trump says in capital letters: FIGHT AND PROTECT SOCIALISM AND MEDICARE WITHOUT CUTS, INCLUDING NEITHER CHANGES TO RETIREMENT AGES. He would repeal the tax on Social Security, but he would not propose any other way to strengthen the retirement system, such as raising taxes or restructuring benefits. This is just the latest example of his agenda leading to the exact Social Security cuts that he has vowed to oppose.
