Former president Donald Trump’s plan to repeal the tax on Social Security benefits would lower taxes for US households by an average of $550, according to a new analysis by the Tax Policy Center. 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. Those making $32,000 or less would receive no tax cut since most of their Social Security income already is untaxed. Those making between $32,000 and $60,000 would get an average tax cut of about $90.
In dollar terms, the biggest winners would be those in the top 0.1 percent of income, who make nearly $5 million or more. They’d get an average tax cut of nearly $2,500 in 2025. But as a share of after-tax income, the biggest beneficiaries would be middle- and upper-middle income households, those making between about $63,000 and $200,000.
One reason for that seeming inconsistency is that Social Security benefits often account for a substantial share of middle-income household 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. But about 28 percent of middle-income households would get a tax cut. Among the top 0.1 percent, about 20 percent of households would get a tax cut.
TPC’s analysis included all Social Security benefits, incorporating survivor’s and disability benefits, as well as retirement. It was unable to break out taxpayers by age due to data limitations.
Effects of excluding Social Security benefits from taxation
Trump announced his idea in one sentence on his Truth Social site. Keep in mind he is not talking about the Social Security payroll tax, which is paid by current workers to fund Social Security and Medicare’s HI trust fund. Rather, he’d repeal the current tax on Social Security benefits, which is paid by individual recipients making $25,000 or more annually ($32,000 for married couples) who currently owe tax on half their Social Security benefits. 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. The Committee for a Responsible Federal Budget estimates Social Security would have to reduce promised benefits by one-quarter if the tax is repealed. Its old age trust fund would become insolvent in 2032 instead of 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. A recent analysis by my Urban Institute colleagues Richard Johnson and Karen Smith found that, even under current law, Social Security insolvency would reduce annual median benefits by $5,900 by 2045 and throw 3.8 million seniors into 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 2024 Republican Party platform, orchestrated by Trump, says, in all capital letters: FIGHT FOR AND PROTECT SOCIAL SECURITY AND MEDICARE WITH NO CUTS, INCLUDING NO CHANGES TO THE RETIREMENT AGE.
It’s notable that Trump also proposed deporting millions of immigrants, many of whom improve Social Security’s finances because they work and pay payroll taxes but are unlikely to collect benefits. Now, he’d repeal the tax on Social Security benefits, without proposing any way to shore up the retirement system by either raising other taxes or otherwise restructuring benefits. It is the latest example of how his agenda inevitably would result in exactly the kind of Social Security cuts he vows to oppose.