Legislation Proposed to Exempt Social Security from Income Tax

During his campaign, President Trump suggested that Social Security should be exempt from federal income tax. Recently, various lawmakers in Congress have introduced bills aimed at achieving this goal.

• In January, Rep. Angie Craig (D-Minn.) announced the You Earned It, You Keep It Act.
• Rep. Jeff Van Drew (R-N.J.) also introduced the No Tax on Social Security Act in January.
• In February, Rep. Thomas Massie (R-Ky) announced the Senior Citizens Tax Elimination Act.

Last month, President Trump urged Congress to pass a comprehensive tax and spending bill that would fulfill several of his campaign commitments. He claimed, “In the coming weeks and months, we will pass the largest tax cuts in American history — including no tax on tips, no tax on Social Security, and no tax on overtime.”

However, an overhaul of the tax law could negatively impact retired workers relying on Social Security. Here’s why.

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Social Security Benefits Could Face Cuts by 23% in 2035

Social Security primarily relies on taxes for funding, with 91% coming from payroll taxes, 4% from taxes on benefits, and 5% from interest on trust fund assets. The program currently operates at a deficit, which means its spending exceeds income due to a growing retired population that pulls benefits compared to a shrinking taxpaying demographic.

The Congressional Budget Office (CBO) projects that the Social Security Trust Fund — which finances benefits for retirees, spouses, survivors, and disabled workers — may be depleted by 2034. When the trust fund ends, it will no longer earn interest, and available tax revenues will only cover 77% of scheduled benefits in 2035. This indicates that benefits may need to be cut by 23% in a decade unless lawmakers intervene to find a solution.

Tax Exemptions Could Accelerate Benefit Cuts

According to the CBO, Social Security will accumulate a $3.3 trillion deficit over the next ten years. Taxes on benefits are expected to generate $1.1 trillion in revenue during this time. Removing this income would worsen the existing deficit significantly, hastening the depletion of the trust fund beyond current estimates and giving Congress less time to avert notable benefit reductions.

The Committee for a Responsible Federal Budget (CFRB) suggests that eliminating taxes on Social Security would precipitate trust fund depletion by one year. A model from the Penn Wharton Budget Model, however, indicates a possible two-year acceleration.

More broadly, the CRFB estimates that exempting tips, overtime, and Social Security from taxes — as proposed by President Trump in the ongoing tax reform debate — could collectively advance trust fund depletion by three years. In this case, benefits could face cuts as early as 2032 unless financial resolutions are made.

Additionally, these tax reforms might shrink Social Security’s revenue by up to $2 trillion over the next decade, resulting in even more severe benefit reductions. The CRFB forecasts a possible 33% cut in benefits by 2035, compared to earlier projections of 23% under existing law.

The bottom line is that while bipartisan legislative efforts aim to eliminate taxes on Social Security, these actions could have detrimental effects on retirees. President Trump’s proposals to exempt tips and overtime from taxes further complicate the landscape, potentially undermining long-term benefits for current and future retirees.

Nancy Altman, President of the nonprofit Social Security Works, stated, “[Trump’s] talking about getting rid of taxation, which increases benefits, but the very benefits that are subject to taxation will be much reduced. So basically, it’s not an honest proposal.”

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