Taxing Social Security: A Growing Concern for Retirees
In 1984, the federal government started taxing Social Security benefits for individuals whose income surpassed certain levels. This change, approved by Congress in 1983, was part of a broad plan aimed at safeguarding the Social Security trust fund from bankruptcy.
At first, the tax impact was minimal—less than 10% of beneficiaries were taxed when the law went into effect. However, as inflation went unaccounted for in subsequent years, that figure has now grown to over 50%. The result? More retirees are paying taxes on their Social Security income than ever before.
During his campaign, Republican presidential nominee Donald Trump proposed removing this tax. “Seniors should not pay tax on Social Security,” he stated on social media in July. After being elected to a second term, many retirees are counting on him to act on this pledge.
Nevertheless, a significant challenge complicates this potential change: Social Security is facing a critical financial dilemma. Abolishing this tax could exacerbate the issue. Here’s why.
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Understanding How Social Security Benefits Are Taxed
Social Security benefits are taxable when an individual’s combined income exceeds specific thresholds. This combined income includes adjusted gross income (AGI), non-taxable interest, and half of Social Security benefits. The following chart illustrates the taxable portion of benefits based on different combined income thresholds for single filers and married couples filing jointly.
|
Taxable Portion of Benefits |
Single Filers |
Joint Filers |
|---|---|---|
|
0% |
Under $25,000 |
Under $32,000 |
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
Above $34,000 |
Above $44,000 |
Data source: The Social Security Administration.
It is crucial to note that these income thresholds have not been updated to account for inflation. This lack of adjustments has become a pressing concern, as Social Security payments usually increase annually due to wage growth and cost-of-living adjustments (COLAs).
Consequently, more retirees are being taxed on their benefits. This trend is expected to continue unless Congress makes changes to either eliminate the tax or adjust the income thresholds—something unlikely in the near term.
Challenges in Eliminating the Social Security Tax
Trump is not alone in proposing the removal of this tax. Earlier this year, Rep. Angie Craig (D-Minn.) introduced legislation aimed at making Social Security benefits non-taxable starting in 2025, mirroring similar efforts from other lawmakers in previous years. Yet, none of these proposals have gathered significant support in Congress.
The primary reason for this lack of action is straightforward: Social Security already confronts significant financial challenges. Funded largely through payroll taxes, the number of program beneficiaries has been skyrocketing, outpacing the number of contributors. As a result, the costs of benefits now exceed incoming revenue, leading to operational deficits.
The Board of Trustees estimates the funding shortfall will reach $22.6 trillion by 2098. Should Congressional action not intervene, the Social Security trust fund is projected to dry up by 2035, leaving only 83% of scheduled benefits payable. Abolishing the tax on Social Security benefits would remove a vital source of revenue, worsening the situation.
Rep. John Larson (D-Conn.) discussed the implications of Trump’s proposal in an August interview with CNBC. “He states he will provide tax relief but fails to mention how it will be funded,” Larson noted. “Essentially, his plan risks undermining the Social Security trust fund.”
However, there is a flicker of hope: Congress must address the looming $22.6 trillion funding shortfall within the next ten years. This necessity presents an opportunity for lawmakers to reconsider tax policies in conjunction with possible cuts to benefits or increases in payroll taxes.
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